4. Debit and Credit Memos

I wanna talk for a second about debit versus credit memos. Debit and credit memos have to do with bank reconciliations, and I told you that there would be a way to remember that. So we looked at this problem, and the relevant part is "debit memo for bank charges, $10." And just from this sentence, we can tell that the bank is taking $10 away from us. So our account is going down $10. So how do we know when we see debit memo if it doesn't say bank charges? If the problem just says "debit memo, $10," how are we supposed to know? Did our account go down $10, or did our account go up $10?

That's what I wanna show you right here. So when you see debit memo, this is from the point of view of the bank. So the bank is debiting your account for $10. And if you remember all the way back to one of the first videos we ever did, debit just means left. So we don't know if that actually means our account went up or our account went down by the $10. So let's think that through. Because we're doing this from the bank's perspective... Let's say we have $1,000 in the bank. To us, that is an asset, right? We would have cash of $1,000, and to us, that's an asset.

But to the bank, what is our cash? Well, technically, this cash still belongs to us despite being in the bank. So technically, the bank still owes us this cash. So from the point of view of the bank, the bank owes us our deposits, right? If you put $100 in a Bank of America account, who does the money belong to? It still belongs to you. So if the bank owes you something, then our deposits are a liability to the bank, right? It's a future economic sacrifice. In the future, the bank is going to have to give us our $1,000 back. The bank doesn't get to just keep it.

It's not a future economic benefit because they're gonna have to remit that money back to us. So if we look at it and say the company and the bank, the situation is $1,000. From the company's point of view, we would say, okay, a $1,000 asset. From the bank's point of view, we would say customer deposits are $1,000, and we put it over here because it is a liability. The bank is holding on to the customer deposits, but they belong to the customer, which means it's a liability.

So when the problem says the bank issues a debit memorandum for bank charges of $10, well, they are debiting your account, and your account to them is a liability. So now your account only has $990 in it. So that's how you're gonna have to remember debit versus credit memo if it doesn't say in the problem. If it says in the problem "for bank charges," well, you're a smart person. You can figure out that the bank charged you $10, and therefore they took $10 away from you. They didn't give you $10. So when you see debit and credit memorandum, think, okay, from the bank's perspective, my money is a liability to them because it's my money that they are holding on to.

So if they issue a debit memo, then that means they're debiting my account, which makes it go down. Now, if they issue a credit memorandum, then that means my account is going up because they are crediting a liability. And when you credit liabilities, they go up.

So I'm about 90% sure that you're never gonna need to know this because I'm about 90% sure that whenever you have a problem involving a debit or credit memorandum, it's gonna say something like "for bank charges." And really, you can just forget all this business and just look at it and figure it out. Well, when the bank charges me, my money goes down. Easy enough. But should this not be here, I want you to be prepared to figure it out yourself. As you can see, it's not any new information. You just have to think it through and say, "Well, if I give my money to the bank, the bank still owes me that $1,000, so that represents an economic sacrifice.

So my deposits in their bank to them are a liability." If they issue a debit, then that means my money is going down. Their liability is going down. If they issue a credit, my money is going up, and the amount of money they owe me, their liability, is also going up.