Normal Debit and Credit Balances for the Accounts

We will now return to the format of the balance sheet and the basic accounting equation: The format of the basic accounting equation can help you understand the normal or expected balances for the general ledger accounts. It will also assist you in understanding the type of entry required to increase an account balance. Here are the relevant points:
  • Asset accounts normally have debit balances and the debit balances are increased with a debit entry.
    • Remember that debit means left side.
    • In the accounting equation, assets appear on the left side of the equal sign.
    • In the asset accounts, the account balances are normally on the left side or debit side of the account.
    • Therefore, the debit balances in the asset accounts will be increased with a debit entry.
  • Liability accounts will normally have credit balances and the credit balances are increased with a credit entry.
    • Recall that credit means right side.
    • In the accounting equation, liabilities appear on the right side of the equal sign.
    • In the liability accounts, the account balances are normally on the right side or credit side of the account.
    • Therefore, the credit balances in the liability accounts will be increased with a credit entry.
  • The owner's capital account (and the stockholders' retained earnings account) will normally have credit balances and the credit balances are increased with a credit entry.
    • Again, credit means right side.
    • In the accounting equation, owner's (stockholders') equity appears on the right side of the equal sign.
    • In the owner's capital account and in the stockholders' equity accounts, the balances are normally on the right side or credit side of the accounts.
    • Therefore, the credit balances in the owner's capital account and in the retained earnings account will be increased with a credit entry.

Examples of Debits and Credits in a Sole Proprietorship

Let's reinforce our debit and credit discussion by using five examples. In this section we will assume that the business is a sole proprietorship. (After these examples, we will illustrate the debit and credit entries for a corporation.)
  1. J. Lee starts a sole proprietorship with $5,000 of her own money When J. Lee invests $5,000 of her personal cash in her new business, the business assets increase by $5,000 and the owner's equity increases by $5,000. As a result, the accounting equation for the business will be in balance. Since assets are on the left side of the accounting equation, the asset account Cash is expected to have a debit balance. The debit balance in the Cash account will increase with a debit entry to Cash for $5,000. The other part of the entry will involve the owner's capital account (J. Lee, Capital), which is part of owner's equity. Since owner's equity is on the right side of the accounting equation, the owner's capital account is expected to have a credit balance and will increase with a credit entry of $5,000. The transaction in the general journal form is:
  2. The business purchases equipment for $3,000 When the business pays $3,000 of its cash for new equipment, the business asset account Cash decreases by $3,000 and the business asset account Equipment increases by $3,000. The following shows that this transaction will keep the accounting equation totals and the balance sheet totals in balance:
    Note: In this topic we show only the change in the accounting equation. To see the cumulative amounts for multiple transactions, see our topic Accounting Equation.
    Since assets are on the left side of the accounting equation, the asset account Equipment is expected to have a debit balance. Since the Equipment account is increasing by $3,000, a debit entry to Equipment for $3,000 is needed. The other part of the entry will involve the asset account Cash, which is expected to have a debit balance. Since the Cash account is decreasing by $3,000, the Cash account must be credited for $3,000. The transaction in the general journal form is: The following T-account illustrates how the debit and credit amounts from the first two transactions have affected the Cash account: Since Cash is an asset account, its normal or expected balance will be a debit balance. Therefore, the Cash account is debited to increase its balance. In the first transaction, the company increased its Cash balance when the owner invested $5,000 of her personal money in the business. (See #1 in the T-account above.) In our second transaction, the business spent $3,000 of its cash to purchase equipment. Hence, item #2 in the T-account was a credit of $3,000 in order to reduce the account balance from $5,000 down to $2,000. Note that the T-account is usually a sketch the accountant or bookkeeper makes in order to visualize the effects that a transaction will have on the two or more accounts involved in a transaction. (The account appearing in the company's general ledger will NOT be in the form of a "T" as we show it here.)
  3. The business earns service revenues of $2,000 and allows the customer to pay 10 days later When the business earns $2,000 by providing a customer with services, the business assets increase by $2,000 and the owner's equity increases by $2,000. The change in the accounting equation will be: Since assets are on the left side of the accounting equation, the asset account Accounts Receivable is expected to have a debit balance. The debit balance in Accounts Receivable is increased with a debit to Accounts Receivable for $2,000. The other part of the entry involves the owner's capital account, which is part of the owner's equity. Since owner's equity is on the right side of the accounting equation, the owner's capital account (which is expected to have a credit balance) is increased with a credit entry of $2,000. However, instead of recording a credit entry directly in the owner's capital account, the credit entry is recorded in the temporary income statement account entitled Service Revenues. Later, the credit balance in Service Revenues will be transferred to the owner's capital account. The transaction in the general journal form is: If a balance sheet is prepared at this time, we must include the balance from the Service Revenues account (as well as the balances from all income statement accounts) in the owner's capital account.
  4. The business collects the $2,000 from the customer who received services 10 days earlier When the business collects the $2,000 from the customer who had been serviced earlier, the business asset account Cash increases by $2,000 and the business asset account Accounts Receivable decreases by $2,000. Since the transaction has one asset increasing and one asset decreasing by the same amount, there will be no change in the cumulative totals for the accounting equation. Since assets are on the left side of the accounting equation, both the Cash account and the Accounts Receivable account are expected to have debit balances. Therefore, the Cash account is increased with a debit entry of $2,000; and the Accounts Receivable account is decreased with a credit entry of $2,000. The transaction in the general journal form is:
  5. The business incurs $800 of advertising expense and pays the amount immediately When the business pays the $800, its asset account Cash decreases by $800 and an owner's equity account decreases by $800. As a result, the change in the accounting equation totals will be: Since assets are on the left side of the accounting equation, the asset account Cash is expected to have a debit balance. The debit balance will decrease with a credit to Cash for $800. The other part of the entry will involve the owner's capital account, which is part of owner's equity. Since owner's equity is on the right side of the accounting equation, the owner's capital account (which is expected to have a credit balance) will decrease with a debit entry of $800. However, instead of recording the debit entry directly in the owner's capital account, the debit entry will be recorded in the temporary income statement account Advertising Expense. Later, the debit balance in Advertising Expense will be transferred to the owner's capital account. The transaction in general journal form is: If a balance sheet is prepared at this time, the balance in the Advertising Expense account (as well as the balances from all income statement accounts) must be included in the owner's capital account.