Debits and credits
Accounting entries on a settlement statement: a debit is an amount a party owes, and a credit is an amount applied in a party's favor. One side's debit is often the other side's credit.
Key Takeaways
- On a settlement statement, a debit is an amount a party owes at closing and a credit is an amount applied in that party's favor.
- The sale price is a debit to the buyer and a credit to the seller, which is why one column's debit is so often the other column's credit.
- Earnest money already on deposit is a credit to the buyer, because the buyer has already paid part of the price.
- Washington's real estate excise tax is the seller's obligation under RCW 82.45.080, so it appears as a seller debit.
What It Means
Debits and credits are the two columns of a settlement statement. A debit is a charge against a party, money that party owes or is paying at closing. A credit is an entry in a party's favor, money that party has already paid, is receiving, or is having paid on that party's behalf. Every real estate closing is bookkeeping, and closings follow double entry logic: an amount entered on one side of the ledger usually has a matching entry on the other side.
The clearest pair is the price itself. On a $625,000 sale, the buyer is debited $625,000 because the buyer owes it, and the seller is credited $625,000 because the seller is owed it. Earnest Money already sitting in a trust account is a buyer credit. A Proration of unpaid property taxes debits the seller for the days of ownership and credits the buyer the same amount. Some entries have no mirror at all: a buyer's loan origination charge is a buyer debit and never touches the seller's column.
Total the buyer's debits, subtract the buyer's credits, and what is left is cash to close. Do the same on the seller's side and the result is the seller's net proceeds.
How It Works in Washington
Washington regulates the paperwork around these numbers rather than the arithmetic itself. RCW 18.85.285 requires the designated broker to keep adequate records of every transaction handled through the firm, and those records must include a copy of the purchase and sale agreement, the earnest money receipt, and an itemization of the receipts and disbursements with each transaction. That itemization is the Closing Statement. WAC 308-124C-105 goes further and requires a transaction folder holding all agreements, receipts, contracts, documents, leases, closing statements, broker price opinions, referral agreements, and material correspondence for each transaction, kept at one location where the firm is licensed.
One Washington entry trips up new brokers. The Real Estate Excise Tax Reet under chapter 82.45 RCW is charged on the selling price at graduated rates set in RCW 82.45.060, and RCW 82.45.080 states that the tax is the obligation of the seller. It belongs in the seller's debit column unless the parties have written something different into their agreement. Our first closing guide and our earnest money guide walk through where these lines land on a real statement.
Example
Alicia Brand buys a Bellingham townhouse from Ray Okafor for $625,000, closing October 8. On Alicia's side, the price is a $625,000 debit. Her $12,500 earnest money, already held in the firm's trust account, is a $12,500 credit, and her new loan of $500,000 is a $500,000 credit, for $512,500 in credits. Her own closing costs add $9,300 in debits. Alicia's cash to close is $625,000 plus $9,300, less $512,500, or $121,800. On Ray's side the same $625,000 is a credit, his loan payoff of $268,400 is a debit, and the Washington excise tax is a debit because RCW 82.45.080 makes it his obligation. The year's property taxes are not yet paid, so Ray is debited for the days he owned the townhouse and Alicia is credited that identical amount, since she will pay the full bill when it comes due.
Common Mistakes and Exam Traps
- A credit is not a discount. It is money already paid or being applied for that party, and it reduces what the party still has to bring to closing.
- Not every entry has a matching entry on the other side. The price and prorations appear in both columns, but a buyer's loan origination charge is a buyer debit with no seller entry.
- Earnest money is a buyer credit, not a seller credit, even though the seller ends up receiving it as part of the price.
- Cash to close is not the down payment. Cash to close is total buyer debits less total buyer credits, so it also carries closing costs and prepaid items.
Where you'll learn this
Frequently Asked Questions
How do you tell whether an item is a debit or a credit?
Ask who owes the money. If the party has to pay the amount at closing, it is a debit in that party's column. If the amount has already been paid for that party or is owed to that party, it is a credit.
What is the difference between the Closing Disclosure and the older HUD-1 settlement statement?
The HUD-1 reads like a traditional accounting ledger, with the buyer's and the seller's debits and credits listed side by side. The Closing Disclosure reorganizes the same figures into loan terms, closing cost details, and a calculating cash to close section, so the entries are grouped by purpose rather than displayed as two facing columns.
Why does the same dollar amount show up twice on a settlement statement?
Because closings use double entry accounting. An amount entered on one side of the ledger needs a corresponding entry on the opposite side, so a seller credit for the sale price is matched by a buyer debit for the same figure.