Debit is a side, not a direction

An account is a T

An account is a record of one thing — Cash, Unearned Revenue, Rent Expense — with two columns. The left column is called the debit side and the right column the credit side. That is all the words mean. Debit is not "minus", credit is not "plus", and neither is good or bad news; they are the names of the two sides of a T. An account's balance is the difference between the two column totals, and it sits on whichever side is larger.

Worked example — the equation drawn as a T

Write the accounting equation and imagine one enormous T laid across it:

              Assets     =     Liabilities  +  Equity
         ┌────────────┐        ┌────────────────────────┐
   left  │  increase  │        │  increase on the RIGHT  │
   side  │  on the    │        │  (the equation's right  │
         │  LEFT      │        │   side)                 │
         └────────────┘        └────────────────────────┘

Assets are on the equation's left, so an asset increases on the left — a debit — and decreases on the right. Liabilities and equity are on the equation's right, so they increase on the right — a credit — and decrease on the left. That is the entire derivation. Nothing has been memorised: the side that increases an element is the side of the equation it lives on.

Now take Northlake Nordic Centre Inc.'s two November accounts from Module 3. Cash is an asset. Its receipts (shares 250,000, loan 400,000, passes 30,000, day passes 18,500) go on the left; its payments (lodge 610,000, supplies 4,200, wages 9,600, groomer payable 50,000, dividend 5,000) go on the right; the balance, 698,500 − 678,800 = 19,700, is on the left — a debit balance. Unearned Revenue is a liability. The 30,000 of season-pass cash received goes on the right, and its balance of 30,000 is a credit balance. Same 30,000, opposite sides, because the two accounts sit on opposite sides of the equation.

Opening retained earnings

Equity has two parts, and retained earnings has three movers — net income up, dividends down, with net income itself being revenues less expenses. Each mover gets its own account, and each inherits its rule from the effect it has on equity:

• Revenues increase equity. Equity increases on the right, so a revenue is recorded with a credit.
• Expenses decrease equity. A decrease in equity is a debit, so an expense is recorded with a debit.
• Dividends decrease equity, so Dividends is recorded with a debit.

Expenses and dividends behave like assets — debit to increase — not because they are assets but because each debit to them is a reduction of equity. That reasoning is what you will need in Module 5 when Accumulated Amortization turns up as an asset-side account with a credit balance: the rule is derived from what the account does to the equation, not looked up by where it sits.

Normal balances

An account's normal balance is the side it increases on, because an account is rarely decreased below zero. So: assets, expenses and dividends normally carry debit balances; liabilities, common shares, retained earnings and revenues normally carry credit balances. Two the paper likes to test: Unearned Revenue is a liability and its normal balance is a credit, whatever the word "revenue" suggests; Prepaid Insurance is an asset, debited when bought, whatever the word "expense" a student expects.

Six accounts to file cold: Supplies (asset, debit) · Accounts Payable (liability, credit) · Common Shares (equity, credit) · Service Revenue (increases equity, credit) · Salaries Expense (decreases equity, debit) · Dividends (decreases equity, debit).