From credit/debit to source/destination

Learn how to convert between traditional credit/debit accounting and Formance’s source/destination model

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

Impact on the balance sheet

Now let’s apply the golden rule to the balance sheet:

$$Assets = Liabilities + Equity$$

Assets

Assets are also called debit normal 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: $Balance = Destination - Source$.

Liabilities and Equity

Liabilities and equity are also called credit normal 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: $Balance = Destination - Source$.

Conversion example

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

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, and the bank account is an asset.

In the credit/debit model, the transaction would be:

Account	Debit	Credit
User Wallet	$0	$100
Bank Account	$100	$0

By applying the golden rule, we get:

Account	Source	Destination
User Wallet	$0	$100
Bank Account	$100	$0

From this, we can derive the balance of the accounts:

Account	Source	Destination	Balance
User Wallet	$0	$100	$100
Bank Account	$100	$0	-$100

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.

We consider the following accounts:

Account	Balance
User 1 Wallet	$200
User 2 Wallet	$0

In the credit/debit model, the transaction would be:

Account	Debit	Credit
User 1 Wallet	$100	$0
User 2 Wallet	$0	$100

Which would result in:

Account	Balance
User 1 Wallet	$100
User 2 Wallet	$100

By applying the golden rule, we get:

Account	Source	Destination
User 1 Wallet	$100	$0
User 2 Wallet	$0	$100

From this, we can derive the balance of the accounts:

Account	Source	Destination	Balance
User 1 Wallet	$100	$200	$100
User 2 Wallet	$0	$100	$100

Withdrawing money from a wallet

Let’s consider a merchant withdrawing $50 from their wallet to their bank account. The wallet is a liability, and the app bank account, from which we initiate the bank transfer, is an asset.

We consider the following accounts:

Account	Balance
Merchant Wallet	$100
Bank Account	$1000

In the credit/debit model, the transaction would be:

Account	Debit	Credit
Merchant Wallet	$50	$0
Bank Account	$0	$50

Which would result in:

Account	Balance
Merchant Wallet	$50
Bank Account	$950

By applying the golden rule, we get:

Account	Source	Destination
Merchant Wallet	$50	$0
Bank Account	$0	$50

From this, we can derive the balance of the accounts:

Account	Source	Destination	Balance
Merchant Wallet	$50	$100	$50
Bank Account	$1000	$50	$950

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 to the business.

We consider the following accounts:

Account	Balance
US Bank Account	$1000
UK Bank Account	$500

In the credit/debit model, the transaction would be:

Account	Debit	Credit
US Bank Account	$0	$250
UK Bank Account	$250	$0

Which would result in:

Account	Balance
US Bank Account	$750
UK Bank Account	$750

By applying the golden rule, we get:

Account	Source	Destination
US Bank Account	$0	$250
UK Bank Account	$250	$0

From this, we can derive the balance of the accounts:

Account	Source	Destination	Balance
US Bank Account	$1000	$250	-$750
UK Bank Account	$750	$0	-$750

As we discussed above, asset accounts have a negative balance in the source/destination model.