Readers Question: What is the difference between a debit and a debt?
A debit item refers to a system of accounting which places a negative amount on the left-hand side of an accounting column. A debit is associated with the purchase of assets or expense transaction. e.g. money leaving your account to purchase a factory.
A debt is an amount of money owed to a particular firm, bank or individual. It could be denominated as a loan, mortgage or other financial instruments. It is a stock concept (fixed at a particular time). It may not necessarily be matched by assets and an ability to repay.
Debts will typically accumulate interest.
- For example, we could refer to government debt of £800bn which they owe to the private sector.
- Any business will have debits and credits as it purchases raw materials and sells the goods to consumers.
However, the existence of debits doesn’t mean that they will necessarily accumulate debts.
Example of debits in the current account
A debit item on the current account occurs when a country has a net outflow of money.
- For example, in the financial account, one component is net UK investment abroad.
- If UK residents purchased fewer assets abroad than they sold, this would be a net credit. This is because more money would be coming into the UK.
- If UK residents purchased more assets abroad than they sold, this would be a net debit. This because the money would be leaving the UK to purchase assets overseas.