The first principle in bank accounting, as in all other bookkeeping, is that for every debit there must be a credit and vice versa. In accordance with this fundamental theory the books must always be in balance. As we have seen with respect to the trial balance, every dollar of liabilities is accounted for by another dollar of resources. This is true of the accounts of every bank.
A debit is an amount entered, or to be entered, on the left side of an account because:
1. Something came into or became due the bank, or
2. An obligation of the bank was reduced, or
A credit is an amount entered on the right side of an account because:
1. An item is disposed of, or
2. An obligation is incurred by the bank, or
3. A profit is made or a loss reduced.
By balance is meant the difference between the left and right side figures of an account. Debit balances, that is, excess left-side figures, are of two kinds:
1. Thoe representing losses of expenses incurred such as salaries, interest paid, and the like. These are classified as losses. (Losses as here used are not confined to out and out losses on account of bad debts and the like.)
Credit balances, or accounts with excess right-side figures are also of two main classes:
1. Those showing gains or earnings, such as commissions or interest earned. These are classified generally as profits, earnings, or gains.
2. Those representing obligations of the bank, such as circulating notes, deposits, and in a sense capital stock. These are called liabilities.