Debit and Credit Rules by Account Type

Debit means left, credit means right

In accounting, debit and credit are not “good” and “bad”, and neither word means “increase” or “decrease” on its own. A debit is an amount entered on the left side of an account; a credit is an amount entered on the right side. Whether a debit makes an account bigger or smaller depends on the type of account. Once you know the type, the side follows from a small set of rules.

The accounting equation

Every rule comes from one equation:

Assets = Liabilities + Equity

Assets are the resources the business controls (cash, receivables, inventory, equipment). Liabilities are what it owes to outsiders (suppliers, lenders, employees, the tax authorities). Equity is the owners’ claim: what would be left for them if all assets were used to pay all liabilities.

Equity changes for four reasons: owners invest (equity goes up), owners withdraw or receive dividends (equity goes down), the business earns revenue (equity goes up) and the business incurs expenses (equity goes down). Writing these out gives the expanded equation:

Assets = Liabilities + Capital (or Common Stock) − Drawings (or Dividends) + Revenue − Expenses

Items on the left of the equation increase on the left (debit) side. Items added on the right increase on the right (credit) side. Items subtracted on the right (drawings, dividends, expenses) work the opposite way and increase with a debit.

The rules in one table

Account type	Increase	Decrease	Normal balance
Asset (Cash, Accounts Receivable, Equipment)	Debit	Credit	Debit
Liability (Accounts Payable, Notes Payable, Salaries Payable)	Credit	Debit	Credit
Equity (Capital, Common Stock, Retained Earnings)	Credit	Debit	Credit
Revenue (Sales Revenue, Service Revenue)	Credit	Debit	Credit
Expense (Rent Expense, Salaries Expense, Cost of Goods Sold)	Debit	Credit	Debit
Drawings or Dividends	Debit	Credit	Debit
Contra-asset (Accumulated Depreciation—Equipment, Allowance for Doubtful Accounts)	Credit	Debit	Credit
Contra-revenue (Sales Returns and Allowances, Sales Discounts)	Debit	Credit	Debit

A common memory aid is DEALER: Dividends, Expenses and Assets increase with a debit; Liabilities, Equity and Revenue increase with a credit.

Normal balances

The normal balance of an account is the side on which it increases, and therefore the side where its balance usually sits: assets and expenses normally show a debit balance; liabilities, equity and revenue a credit balance. A balance on the “wrong” side is a warning sign. Accounts Payable with a debit balance, for example, means the business has paid a supplier more than it owed, or that an entry was posted to the wrong side. Some abnormal balances are real (a bank overdraft turns Cash into a credit balance), but each one deserves a second look.

Contra accounts have the normal balance opposite to the account they reduce. Accumulated Depreciation—Equipment has a credit balance and is subtracted from Equipment to show the asset’s book value.

Worked examples

Each example shows the entry and its effect on the equation. In every case the equation still balances after the entry.

1. Borrowing from a bank

The business borrows $10,000 and signs a note payable. An asset increases (debit) and a liability increases (credit).

Account	Debit	Credit
Cash	10,000
Notes Payable		10,000

Effect: assets +10,000 = liabilities +10,000.

2. Paying a supplier

The business pays $3,000 it owed to a supplier. A liability decreases (debit) and an asset decreases (credit).

Account	Debit	Credit
Accounts Payable	3,000
Cash		3,000

Effect: assets −3,000 = liabilities −3,000.

3. Collecting from a customer

A customer pays $1,000 of an amount billed earlier. One asset increases and another decreases; totals do not change.

Account	Debit	Credit
Cash	1,000
Accounts Receivable		1,000

Effect: assets +1,000 − 1,000 = no change. No revenue is recorded, because it was recorded when the service was billed.

4. Paying a dividend

A corporation declares and pays a cash dividend of $500 on the same day. Dividends reduce equity, so the Dividends account increases with a debit; Cash decreases.

Account	Debit	Credit
Dividends	500
Cash		500

Effect: assets −500 = equity −500. Dividends are a distribution to owners, not an expense: they do not reduce net income. When a dividend is declared on one date and paid later, the declaration credits Dividends Payable and the payment debits it.

Revenue and expense are equity in disguise

Revenue and expense accounts exist so that the business can measure its income for the period. During the year they collect amounts separately; at year end their balances are moved into Retained Earnings (or the owner’s Capital account) by the closing entries. This is why revenue behaves like equity (credit to increase) and expenses behave like reductions of equity (debit to increase).

Same rules in every convention

The rules above hold in every convention on PractiBalance. Spanish uses Debe (debit) and Haber (credit), French Débit and Crédit, German Soll and Haben. What changes is the chart of accounts: Spain (PGC) and France (PCG) number their accounts by class, and German textbooks write entries as “Soll an Haben” (for example “Bank an Forderungen aLL”). A few account types also differ in practice. Under a periodic inventory system, goods bought for resale are debited to a purchases expense account instead of Inventory, and the Spanish chart (608 for purchase returns, 606 for cash discounts on purchases) and the French chart (609 for rebates and discounts obtained on purchases) have contra-expense accounts, which increase with a credit.

Practice

Apply the rules on business start, cash and bank and notes and loans items, then see how the same amounts accumulate in T-accounts. Terms such as normal balance and contra account are in the glossary.