From credit/debit to source/destination

This guide shows you how to convert between traditional credit/debit accounting and Formance’s source/destination model

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The golden rule

The golden rule for converting a credit/debit accounting model to a source/destination model is:

• Credit becomes Destination
• Debit becomes Source

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Normal accounts

In accounting practice we usually designate accounts as normal debit or normal credit, depending if these are on the asset or liability side of the balance sheet. As such they create a perspective of looking at the Ledger traditionally from an accountant’s perspective. Debit and Credit mentioned above are influenced potentially from this perspective, and as such these are translated as follows:

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Impact on the balance sheet

Now let’s apply the golden rule to the balance sheet: $$\sum Assets = \sum Liabilities + \sum Equity$$

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Assets

Assets are also called normal debit accounts. They are increased by debits and decreased by credits. Therefore, in the source/destination model, when an asset account is increased, the source component is increased, hence the balance is decreased, as per the balance equation: $$Balance = \sum Destination - \sum Source$$

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Liabilities and Equity

Liabilities and equity are also called normal credit accounts. They are increased by credits and decreased by debits. Therefore, in the source/destination model, when a liability account is increased, the destination component is increased, hence the balance is increased, as per the balance equation: $$Balance = \sum Destination - \sum Source$$

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Conversion example

Now, let’s convert common transactions from the credit/debit model to the source/destination model.

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Topping-up a wallet with a bank transfer

Let’s consider a user topping-up their wallet with a bank transfer. To the business, the user wallet is a liability, hence normal credit, and the bank account is an asset, so normal debit. In the credit/debit model, the transaction would be: By applying the golden rule, we get: From this, we can derive the balance of the accounts:

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Transferring money between two wallets

Let’s consider user 1 transferring $100 from their wallet to user 2’s wallet. Both wallets are liabilities to the business, and as such both are normal credit. As the normality of the accounts is not in play here, the basic Golden Rule applies. We consider the following accounts: In the credit/debit model, the transaction would be: Which would result in: By applying the golden rule, we get: From this, we can derive the balance of the accounts:

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Withdrawing money from a wallet

Let’s consider a merchant withdrawing $50 from their wallet to their bank account. The wallet is a liability, so that would be a normal credit, and the app bank account, from which we initiate the bank transfer, is an asset, a normal debit account. We consider the following accounts: In the credit/debit model, the transaction would be: Which would result in: By applying the golden rule, we get: From this, we can derive the balance of the accounts:

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Treasury movement between two bank accounts

Let’s consider a business moving $250 from a bank account located in the US to a bank account located in the UK. Both bank accounts are assets, so normal debit to the business. As the normality of the accounts is not in play here, the basic Golden Rule applies. We consider the following accounts: In the credit/debit model, the transaction would be: Which would result in: By applying the golden rule, we get: From this, we can derive the balance of the accounts: