Definition
Debit in Closing Statements
In a real estate transaction’s closing statement, a debit pertains to an item that is charged to a party. This contrasts with a ‘credit,’ which refers to an item that is refunded or credited to a party.
For example, typical debits for a buyer include:
- Purchase price
- Taxes prepaid by the seller
- Deed recording fees
Typical debits for a seller include:
- Cost to retire existing mortgage principal
- Accrued interest on the mortgage being relieved
- Termite inspection fees
Debit in Accounting
In accounting, a debit refers to entries recorded on the left side of the general ledger. Debits are central to the double-entry bookkeeping system and contrast directly with ‘credits,’ which are recorded on the right side.
Examples of typical debits include:
- Acquisition cost of assets
- Amounts of deductible expenses
Examples
-
Real Estate Transaction:
- Buyer: The buyer’s closing statement showed a debit of $200,000 for the purchase price of the house.
- Seller: The seller had a $150,000 debit to cover the remaining principal on the existing mortgage.
-
Accounting Entry:
- A company debits $10,000 in its general ledger for new office equipment.
- An expense of $500 for utility bills is debited.
Frequently Asked Questions (FAQs)
Q: What is the difference between a debit and a credit in a closing statement? A: A debit is an amount charged to a party (buyer or seller), while a credit is an amount given to a party for prepayments or adjustments.
Q: Can a debit mean an expense in real estate? A: Yes, in the context of a closing statement, a debit can represent an expense or obligation that the buyer or seller needs to pay.
Q: How does a debit affect the general ledger in accounting? A: Debits increase asset or expense accounts and decrease liability, equity, or revenue accounts in a general ledger.
Q: Are taxes always a debit for the buyer in a real estate transaction? A: Taxes prepaid by the seller can indeed be a debit for the buyer because the buyer needs to reimburse those prepaid taxes.
Q: Why would accrued interest be a debit for the seller? A: Accrued interest would be a debit for the seller because it represents an amount that must be paid off as part of settling the existing mortgage.
Related Terms
Credit: An entry that decreases assets and expenses or increases liabilities and equity in accounting; also an item that the party is due or refunded in a closing statement.
Double-Entry Bookkeeping: An accounting system where each transaction impacts at least two accounts, involving a debit and a credit.
General Ledger: A comprehensive record of all financial transactions of a business, which includes all debits and credits.
Closing Costs: Expenses aside from the property cost involved in transferring property ownership, often leading to debits and credits in the closing statement.
Online Resources
- Investopedia - Real Estate Closing Costs
- IRS - Publication 523: Selling Your Home
- National Association of Realtors
References
- Investopedia. (n.d.). Real Estate Closing Costs. Retrieved from https://www.investopedia.com/terms/c/closingcosts.asp
- Internal Revenue Service (IRS), Publication 523. Selling Your Home. Retrieved from https://www.irs.gov/publications/p523
- National Association of Realtors. Retrieved from https://www.nar.realtor/
Suggested Books for Further Studies
- “Principles of Accounting” by Belverd E. Needles, Marian Powers, and Susan V. Crosson
- “Real Estate Finance & Investments” by William B. Brueggeman and Jeffrey D. Fisher
- “Foundations of Real Estate Financial Modelling” by Roger Staiger
