The next time you receive a statement from your bank, check additions and deductions made on the statement. The bank usually puts in the "plus category" items that increase your account balance and in the "minus category" elements that reduce funds in the account. Understanding the banking concepts of "debit advice" and "credit advice" can help you track your spending.
A debit advice is also called a debit memorandum, debit note or debit. A banker sends a debit note to customers to inform them of deductions from their accounts. In other words, a debit refers to a decrease in a deposit account balance, such as a check posted to the account. These days, the advent of the Internet has made debit advices quicker. Consequently, deductions resulting from debit advices occur in real time. For example, you can advise your bank to pay a monthly utility bill automatically, and the corresponding debit advice happens in real time.
Unlike a debit advice, a credit note is a transaction that increases a customer's funds. Stated differently, a credit memorandum refers to an increase in a deposit account balance, such as a deposit made to the account. For example, you file your annual tax return and advise the Internal Revenue Service to send your refund electronically. Once the IRS approves the refund amount, it sends the funds to your bank, which in turn credits your account.
The concepts of debit and credit are at the heart of modern-day banking. These terms help bankers run their businesses efficiently, ensuring that customer accounts reflect accurate balances. Account accuracy helps financial institutions retain customers and improve their reputation in the marketplace. There is correlation between "debit advice" and "credit advice" because a debit memorandum in one customer's account represents a credit note in another client's account.
Banks rely on specific tools and state-of-the-art technology to make sure employees record accurate debits and credits. These tools include customer relationship management, database management system programs and operating system applications. Other resources include mainframe computers, banking administration software, financial analysis software, and credit adjudication and lending management system software, or CALMS.
Accounting and Reporting
The accounting terms of "credit" and "debit" are distinct from banking concepts. Accountants follow a different set of rules when recording transactions in financial accounts. These include assets, liabilities, equity items, revenues and expenses. An accountant debits an asset or expense account to increase its amount and credits the account to reduce its balance. The opposite is true for a revenue, liability or equity account. For example, a debit note to the cash account means a reduction of corporate funds because cash is an asset account.