Let us recall what an "account" is first. In accounting, an account is a specific asset, liability, or equity unit in the ledger that is used to store similar transactions.
Examples of accounts are: Cash, Accounts Receivable, Office Equipment, Accounts Payable, Service Income, Rent Expense, and so on.
Let's take "Cash", for example. The Cash account stores all transactions that involve cash receipts and cash disbursements. By storing these, accountants are able to monitor the movements in cash as well as it's current balance.
Next, let us define "debit" and "credit". Debit means left and credit means right. Do not associate any of them with plus or minus yet. Debit simply means left and credit means right – that's just it! "Debit" is abbreviated as "Dr." and "credit", "Cr.".
The terms originated from the Latin terms "debere" or "debitum" which means "what is due", and "credere" or "creditum" which means "something entrusted or loaned".
And finally, we define what we call "normal balance". Each account has a debit and a credit side. You could picture that as a big letter T, hence the term "T-account". Again, debit is on the left side and credit on the right. Normal balance, as the term suggests, is simply the side where the balance of the account is normally found.
Asset accounts normally have debit balances, while liabilities and capital normally have credit balances. Income has a normal credit balance since it increases capital. On the other hand, expenses and withdrawals decrease capital, hence they normally have debit balances.
Now what is the significance of the "normal balance"?
When you place an amount on the normal balance side, you are increasing the account. If you put an amount on the opposite side, you are decreasing that account. Therefore, to increase an asset, you debit it. To decrease an asset, you credit it. To increase liability and capital accounts, credit. To decrease them, debit.
Let us take Cash. Cash is an asset account. Again, asset accounts normally have debit balances. Therefore, to increase Cash you debit it. To decrease Cash, you credit it.
Another example – let's take Accounts Payable. It is a liability account. Liability accounts normally have credit balances. Thus, if you want to increase Accounts Payable, you credit it. If you want to decrease Accounts Payable, you debit it.
The same rules apply to all asset, liability, and capital accounts.
Here's a table summarizing the normal balances of the accounting elements, and the actions to increase or decrease them. Notice that the normal balance is the same as the action to increase the account.
|Accounting Element||Normal Balance||To Increase||To Decrease|
Tip: You don't need to memorize the whole table. Just be familiar with the normal balance portion and you'll be fine. The normal balance is the same as the action to increase the account. The action to decrease the account is simply the opposite.
1. Debit; 2. Credit; 3. Debit; 4. Debit; 5. Credit; 6. Credit; 7. Debit; 8. Credit.
What about item #9? How do you increase Accumulated Depreciation?
Accumulated Depreciation is a contra-asset account (deducted from an asset account). For contra-asset accounts, the rule is simply the opposite of the rule for assets. Therefore, to increase Accumulated Depreciation, you credit it.
We will apply these rules and practice some more when we get to the actual recording process in later lessons.
Each account has a debit and credit side. Debit pertains to the left side of an account, while credit refers to the right.
Asset accounts normally have debit balances. Hence, to increase an asset account, we debit it. To decrease an asset account, we credit.
Liability and capital accounts normally have credit balances. To increase them, we credit. To decrease, we debit.
Expense accounts normally have debit balances, while income accounts have credit balances.