Debit card and credit card are the types of plastic cards which are used for making payments online and using EFTPOS terminals on the point of sale. Both types of cards are issued by the same companies like VISA and Master card and are accepted almost all over the world. These cards reduce the need to carry cash for personal as well as business needs because the payments can be made from these cards.
Definitions and explanations
Debit card is a type of plastic card which uses cash from one’s bank account when making a payment. When a payment is made by using debit card, the debit card issuing company takes cash from the payer and transfers to the account of receiver. It means when making payments using debit card cash is deducted from the payer’s bank at the time of payment. It is just an alternative for cash payments and reduces the need to carry cash with one to reduce the risk of theft.
Dr. Supplier account
Cr. Bank account
Notice that the above journal entry reduces the balance in bank account (i.e., cash at bank).
Credit card is a type of plastic card which provides a method for payment and allows some credit to the payer. Credit limit is set by the card issuing company or bank. When any payment is made through credit card, payment is not taken from payer at that time rather it is paid on a later date. All the payments made from credit card during a month are accumulated and billed to the card holder and some credit period is allowed to him to make the payment. The card holder is bound to make the payment of the billed amount before due date. In this way any person who doesn’t have cash can buy goods or services and make payment through credit card. Later on he can make the payment before due date once the credit card bill is issued.
If the credit card is used to make a payment to a vendor in the ordinary course of business, the accounting journal entry (or double entry) would be made as follows:
Dr. Supplier account
Cr. Credit card payable
Notice that the above journal entry does not impact the bank account but raises a liability known as credit card payable liability. When the credit card bill will be paid, the credit card payable liability will be reduced or eliminated by debiting credit card payable account and crediting cash account. The entry for the payment of credit card bill will look like the following:
Dr. Credit card payable
Difference between debit card and credit card
The major difference between debit card and credit card has been explained by the following points:
Debit card provides just an alternative for making the payments without holding the cash when going for shopping. Credit card provides credit to individuals and they can making shopping or make other payments within the credit limit and can make the payment later.
2. Recording of payment
When making a payment through debit card it is recorded as decrease in bank balance because cash is immediately deducted from individual’s account. However when a payment is made through credit card it is recorded as a liability because cash is not taken from individual’s account at that time and he has to pay it later before due date of the credit card bill.
3. Payment limit
When making payment from a debit card, you can make any payment up to the amount available in your bank account however there may be a limit on daily or monthly spending. But when a payment is made from a credit card, you can make only the payment which is within provided credit limit by the credit card issuer.
4. Timing of payment
When debit card is used to make payments, cash is deducted from the payer’s account immediately but when credit card is used to make any payment cash is to be paid later on before due date of the credit card bill.
5. Ease of getting a card
Debit card is easy t get issued from any bank. Bank will issue a debit card if you have an account in that bank and are properly maintaining it. However getting a credit card is difficult because bank will assess your credit worthiness before issuing the card and if you meet their criteria they will issue credit card to you.
6. Interest on late payments
When making a payment through a debit card, cash is immediately is deducted from your bank account and therefore there is no interest on late payment. When a payment is made through a credit card, you have to pay within due date of the card bill. If not paid on time, you will have to pay interest on late payment which is normally calculated on daily basis.
Debit card versus credit card – tabular comparison
A tabular comparison of debit card and credit card is given below:
|An alternative for making payments in cash||To get a credit period for financing immediate needs|
|Recording a payment|
|Decrease in bank balance||Increase in a liability|
|Normally equal to cash available in your bank account||Equal to allowed credit limit by card issuer|
|Timing of payment|
|Cash is paid at the time of purchasing||Cash is paid after some period allowed by the card issuer|
|Ease of getting a card|
|Getting a debit card is easier than credit card||Getting a credit card is difficult as compared to debit card|
|Interest on late payments|
|No chance of late payment because cash is deducted immediately||If payment is not made on due date, interest is charged on amount due|
Conclusion – debit card vs credit card
Debit card and credit card are types of plastic cards. Although both are used to make payments without the need of carrying cash to the point of shopping but there is a basic difference between both cards. When making a payment through debit card cash is deducted immediately from payer’s bank account however when a payment is made from credit card cash is not deducted from payer’s bank account. Payer or card holder is provided some free credit period and after that period he has to make the payment. He will get credit card bill periodically with a specific due date and then need to make payment by that due date. When paying through debit card, payment limit is normally your bank balance however there may be daily usage limit but when making payment through a credit card there is an allowed credit limit for each user.