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Lesson 1 of 13The Accounting Cycle: Service Business
Unit 2 · Lesson 1 of 13

The Account, Debits, and Credits

Every item on a balance sheet has its own account, and every account uses the same two-sided debit/credit structure to track increases and decreases.

3 min read8 practice questionsAsk AI about this →

Key things to remember

  1. 1Debit = left side of an account. Credit = right side of an account. Neither word means "good" or "bad."
  2. 2Assets increase with debits and decrease with credits (normal debit balance).
  3. 3Liabilities and Capital increase with credits and decrease with debits (normal credit balance).
  4. 4Drawings and Expenses increase with debits (they both reduce owner's equity, like assets do to the equation's balance).
  5. 5Revenue increases with credits (it increases owner's equity, like Capital).
  6. 6The debit/credit rules exist to keep balanced after every single transaction.

A balance sheet only shows totals at one moment — it can't show you every transaction that built up to that total. An account is a form in which changes to an item caused by a transaction are recorded, one account per asset, liability, or equity item. A group of accounts is called a ledger. Before computers, accountants drew each account as a large letter T on paper, and the shape stuck as the standard teaching tool: the T-account.

CashDebit (left)Credit (right)Jan 2 4 000Jan 9 1 200Jan 18 600Jan 5 900Jan 22 5005 800 footing1 400 footingBalance: 4 400 Dr(5 800 - 1 400, on the larger/debit side)
Fig 1The T-account: a title on top, debits on the left, credits on the right.
  • Debit simply refers to the left side of an account — nothing more, nothing less. It does not mean "increase" or "bad."
  • Credit simply refers to the right side of an account. It does not mean "decrease" or "good."
  • Every account has a title, a debit (left) side, and a credit (right) side, and its balance is whichever side has the larger total.

Why Debits and Credits Follow the Equation

The rules for which side increases an account aren't arbitrary — they come straight out of the balance sheet equation, . Picture the equation as one long T-account itself: assets sit on the left side of the equals sign, liabilities and owner's equity sit on the right. Every account simply inherits the side of the equation it lives on. Asset accounts increase on the left (debit) because assets are on the left side of the equation. Liability and owner's equity (Capital) accounts increase on the right (credit) because they're on the right side of the equation.

Two extra account types complicate the picture slightly, but both make sense once you remember what they do to owner's equity. Drawings reduces owner's equity, so it behaves the opposite of Capital — it increases on the debit side. Expenses also reduce owner's equity (since net income, which increases Capital, is Revenue minus Expenses), so expenses also increase on the debit side. Revenue increases owner's equity, so it increases on the credit side, the same side as Capital.

Account typeIncreases withDecreases withNormal balanceAssetDebitCreditDebitLiabilityCreditDebitCreditOwner's EquityCreditDebitCreditRevenueCreditDebitCreditExpenseDebitCreditDebit
Fig 2The full set of debit/credit rules for every account type, derived from A = L + OE.
Account typeNormal balanceIncreases withDecreases with
AssetsDebitDebitCredit
LiabilitiesCreditCreditDebit
Owner's CapitalCreditCreditDebit
Owner's DrawingsDebitDebitCredit
RevenueCreditCreditDebit
ExpensesDebitDebitCredit
Memorize this table — every journal entry you will ever write depends on it.
A one-line way to remember it
Anything that makes owner's equity go up (Capital, Revenue) has a normal credit balance. Anything that makes owner's equity go down, or is on the opposite side of the equation from OE (Assets, Drawings, Expenses), has a normal debit balance.
Normal balance
The "normal balance" of an account is simply the side that increases it. An account's balance can temporarily sit on its abnormal side (e.g., a bank account overdrawn to a credit balance), but that's a red flag worth investigating, not the expected result.

Worked examples

Reveal one step at a time and try to beat it to the next line.

Example 1
State the normal balance (debit or credit) of: Cash, Accounts Payable, J. Reyes, Capital, Wages Expense, and Fees Earned. Justify each using the accounting equation.
Example 2
Trillium Bike Repair's Cash account starts the year with a $10,000 debit balance. During the year it is debited for 500, and $400 (three separate increases) and credited for 350, 650, and $150 (five separate decreases). Find the ending balance and state which side it's on.

Where marks get lost

  • Thinking "debit" always means increase and "credit" always means decrease — it depends entirely on the account type.
  • Believing debit/credit relate to good news or bad news for the business (like a bank statement's "credit" to your account) — in accounting, they are purely positional: left and right.
  • Forgetting that Drawings and Expenses behave like assets (debit-normal) rather than like Capital, even though they all connect to owner's equity.
  • Memorizing the rules as a list without connecting them back to — that connection is what lets you rebuild the rules if you forget them.

Flashcards 10

Account
Debit
Credit
Ledger
+ 6 more

Practice

1
Which side of an account is the credit side?
2
Which account type has a normal credit balance?
3
Wages Expense has a normal debit balance because...
4
In your own words, what does "debit" mean in accounting?
5
Match each account to its normal balance.
Cash
Bank Loan
Fees Earned
J. Reyes, Drawings
6
An asset account is debited $4,200 and credited $1,500 over a period, starting from a zero balance. What is the ending balance?
$
7
Order these account types from most "debit-normal" thinking to most "credit-normal" thinking: Revenue, Assets, Liabilities, Expenses.
  1. 1Assets
  2. 2Revenue
  3. 3Liabilities
  4. 4Expenses
8
Which statement about debits and credits is TRUE?

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