Debits vs. Credits

Ah, the yin-and-yang of accounting. Newton's Third Law #AccountingEdition, if you will. If Newton's Third Law states...

For every action, there is an equal and opposite reaction.

...then Newton's Third Law #AccountingEdition states...

For every debit, there must be a credit. (This is referred to as double entry accounting.)

Why is this the case? In essence, it ensures that as we add journal entries to our general journal (we'll get to this in the next article), the accounting equation...

Assets = Liabilities + Equity

...remains true at all times!

Based on this, we can understand that...

Every journal entry must have a debit and an equal credit.

We'll get to journal entries in the next article. First, we need to understand how debits vs. credits relate to the normal balance of a given account!

Addressing normal balances

We went through a lot of accounts in Assets, Liabilities, & Equity. Each of those accounts have what's called a normal balance.

The normal balance of an account dictates whether a debit or credit makes the account increase or decrease.

If an account has a normal debit balance, then a debit will make it increase & a credit will make it decrease.
If an account has a normal credit balance, then a debit will make it decrease & a credit will make it increase.

So... how can you tell whether a given account has a debit or credit normal balance?

Lucky for us, it's decently simple, and can be broken down with the following table!

Notice how the left side of the accounting equation...

Assets = Liabilities + Equity

...has a normal debit balance...

...and the right side of the accounting equation...

Assets = Liabilities + Equity

...has a normal credit balance.

Addressing revenue and expenses

Remember, revenue and expenses make up net income, which directly relate to equity. That's why they're indented below equity in the table.

The reason why Revenue has a normal credit balance is because when revenue increases, so does net income. And when net income increases, so does equity!

The reason why Expense has a normal debit balance is because when expenses increase, net income decreases. And when net income decreases, so does equity!