Debit means left and credit means right. That's it. This guide shows you how to figure out the normal balance of any account from the accounting equation, with T-account diagrams, a cheat sheet, a shortcut for when you blank on a test, and practice problems with answers.
Section I. A Quick Note
Before we begin, it is extremely important that you forget all of your preconceived notions of the words "debit" and "credit." You shouldn't associate them with debit cards or credit cards. Neither debits nor credits are inherently good or bad. Debit isn't good, and credit isn't bad. "Debit" and "credit" mean something very particular in the accounting world.
It's important to get that out of the way up front. It will save you a lot of pain later on if you can disassociate those terms now and start with a fresh perspective. Now that you know what not to do, let's take a look at what those words actually mean.
Section II. A Matter of Sides
"Debit" and "credit" most literally mean "left" and "right." That's it, nothing more, nothing less.
Debit = Left. Credit = Right.
Go back and read that again. One more time. It is imperative that you understand that the only meaning those words have is in relation to their sides, left or right.
Where do those sides come from? Accountants keep track of each account (cash, accounts payable, revenue, and so on) in a T-account. It's called that because it's literally a T: the account's name goes on top, and the T gives you a left side and a right side. Instead of calling them the left and right sides, accountants call them the debit side and the credit side.
You can also use the words as verbs. "Debit cash for 200" means put 200 on the left side of the cash account, because debit means left. "Credit sales for 500" means put 500 on the right side of the sales account. Notice that so far I haven't told you whether any of that made cash or sales go up or down. All we've done is put numbers on sides. That's not the tricky part. The (slightly) tricky part is remembering which side increases each account, and for that we need the accounting equation.
Watch the videoT-Accounts (4 min) Watch the videoDebits and Credits (7 min)Let's take a look at the accounting equation:
Assets = Liabilities + Shareholders' Equity
The accounting equation must always be in balance: the left side (assets) must always equal the right side (liabilities and equity). Let's look at the equation in terms of left and right:
| Assets | = | Liabilities + Shareholders' Equity |
| ← Left | Right → | |
| Debits | Credits |
An increase to the left side of the equation is a debit (debit means left), and an increase to the right side of the equation is a credit (credit means right).
Section III. Determining Normal
Now that we understand that the left side of the equation is increased by debits and the right side by credits, let's turn to determining the normal balances for specific accounts. An account's "normal balance" is simply the side of the account, either debit or credit, that is used to increase the value of that account. Normal just means the plus side.
It's best that you don't try to memorize the normal balance for every single account. There's cash, accounts receivable, accounts payable, revenues, expenses, dividends, and the list goes on and on, and you may see one on a test that you've never seen before. Rather, try to learn the process used in determining whether it is a debit or a credit. Start with an easy one: assets.
Assets live on the left side of the equation. How do you increase the left side of the equation? With a debit, because debit means "left." That was easy enough. How then would you decrease assets? Simply do the opposite of whatever you did to increase them, of course. If debits increase, credits decrease. In a visual format, you end up with the following T-account:
| Assets | |
| Debits | Credits |
| Increase | Decrease |
You've just logically determined for yourself how to increase and decrease the asset account, no memorizing required. Cash is an asset, so if someone says "debit cash for $500," that literally means put $500 on the left side, and because the left side is the plus side for an asset, it also means cash went up $500. To figure out any account, you simply have to remember 1) the accounting equation and 2) what debit and credit mean. Let's try another basic one: liabilities.
Liabilities live on the right side of the equal sign. We know that the right side is for credits, therefore liabilities are increased with credits. That leaves us with the following T-account for liabilities:
| Liabilities | |
| Debits | Credits |
| Decrease | Increase |
So if a problem says "increase accounts payable by $1,000" without telling you debit or credit, you can walk the chain: accounts payable is money we have to pay, so it's a liability. Liabilities live on the right side. Right means credit. Credit accounts payable for $1,000. You didn't really solve anything, you just put together pieces you already knew.
The same logic and result can be applied to the equity accounts:
| Equity | |
| Debits | Credits |
| Decrease | Increase |
These three (assets, liabilities, and equity) are very simple to solve for, as they are clearly evident from the accounting equation. They provide a great starting point before we get to slightly more complicated examples.
Watch the videoDetermining Normal Balances For Assets & Liabilities (11 min)Section IV. The Case of the Non-Obvious
Some accounts, however, are not as obvious because they are not directly named in the accounting equation. Revenue, for example, is not directly mentioned in the equation. Neither are dividends or contra-assets. Don't fret though, we simply have to keep using our previous framework, albeit a slightly extended version.
First, remember that shareholders' equity is made up of two pieces: contributed capital (stock) and retained earnings. Both of those are part of equity, so an increase in either one is an increase in equity, and both are increased with credits. Retained earnings, in turn, is where revenues, expenses, and dividends end up: beginning retained earnings, plus net income (revenues minus expenses), minus dividends, equals ending retained earnings.
Take revenues as our first challenge. Let's trace the revenue account all the way through the closing process. (Remember that income statement accounts get closed at the end of every year.)
- An increase in revenues increases net income.
- An increase in net income increases retained earnings.
- An increase in retained earnings increases shareholders' equity.
- Shareholders' equity is increased with a credit, so revenues are increased with a credit.
Revenues increase net income, which increases retained earnings, which increases shareholders' equity. Therefore, revenues increase shareholders' equity, which means revenues are increased the same way that equity is increased. How is the shareholders' equity account increased? It's on the right side, so it's a credit. Revenues must be a credit too, then.
It seems like a complicated process, so let's do a quick recap. The three accounts in the accounting equation are easy to remember, based on the side of the equation they are on, so those should always be your endpoint. In the previous example, we needed to determine the effect of an increase in revenue on shareholders' equity. Since an increase in revenue resulted in an increase in equity, and any account that increases the right side of the equation is a credit, revenue is a credit. As a result, we have derived the T-account for revenue:
| Revenue | |
| Debits | Credits |
| Decrease | Increase |
As you can probably imagine, just as assets and liabilities have opposite normal balances, revenues and expenses have opposite normal balances. For those curious, here is the proof:
- An increase in expenses decreases net income.
- A decrease in net income decreases retained earnings.
- A decrease in retained earnings decreases shareholders' equity.
- Shareholders' equity is decreased with a debit, so expenses are increased with a debit.
Now that we've done the hardest two, we'll turn to two more: dividends and contra-accounts. First, dividends.
Accounting makes logical sense, as will be shown in this example: dividends decrease retained earnings, because it is money given to the shareholders and is therefore no longer retained. Even if you didn't know what the effect of dividends is, you could get there logically. Retained earnings is what the company retains, and since dividends are given back to the shareholders, dividends must reduce retained earnings. It's very important to try to learn instead of memorize, because learning is much easier and much more effective. Carrying on: dividends reduce retained earnings, which reduces equity, which means dividends are increased with a debit.
- An increase in dividends decreases retained earnings.
- A decrease in retained earnings decreases shareholders' equity.
- Shareholders' equity is decreased with a debit, so dividends are increased with a debit.
Leaving us with the following T-account:
| Dividends | |
| Debits | Credits |
| Increase | Decrease |
Finally, contra-accounts. Contra-accounts are accounts whose only purpose is to take away from some other account. Accumulated Depreciation, for example, is a contra-asset. It serves to decrease the value of long-term assets; that is its only purpose. Sales returns are contra-revenues. When someone returns a product, it is no longer a revenue and must therefore be subtracted from revenue, hence: contra-revenue.
Determining the normal balance for contra-accounts is delightfully simple: it is the opposite of the account to which it is contra. The word "contra" means opposite, remember that.
- Contra-asset? Assets are increased with debits, and the opposite of that is a credit.
- Contra-liability? Liabilities are increased with credits, and the opposite is a debit.
- Contra-revenue? Revenues are credits, so contra-revenues are debits.
It really is as easy as that. Just take the opposite of the normal balance of the main account (whatever account the contra-account is affecting).
Watch the videoDetermining Normal Balance for Shareholder's Equity (12 min)Section V. The Whole Picture
Here's everything from the last two sections on one page. Every account is either an asset, a liability, or a piece of equity, and revenues, expenses, and dividends all flow into equity through retained earnings. If you can get back to the accounting equation, you can figure out anything.
And here's the same thing as a cheat sheet. Don't memorize this table. Read each row and convince yourself why it's true, and you'll never need it.
| Account type | Examples | Normal balance | Increases with | Decreases with |
|---|---|---|---|---|
| Assets | Cash, Accounts Receivable, Inventory, Land | Debit | Debit | Credit |
| Liabilities | Accounts Payable, Notes Payable, Unearned Revenue | Credit | Credit | Debit |
| Contributed capital | Common Stock | Credit | Credit | Debit |
| Retained earnings | Retained Earnings | Credit | Credit | Debit |
| Revenues | Sales Revenue, Service Revenue | Credit | Credit | Debit |
| Expenses | Rent Expense, Wages Expense, Cost of Goods Sold | Debit | Debit | Credit |
| Dividends | Dividends | Debit | Debit | Credit |
| Contra-assets | Accumulated Depreciation, Allowance for Doubtful Accounts | Credit | Credit | Debit |
| Contra-revenues | Sales Returns and Allowances, Sales Discounts | Debit | Debit | Credit |
Section VI. When You Blank: Start With What You Know
Let's say you're on a test and you completely blank on one of the accounts. Don't panic. Accounting is a double-entry system: every event has at least two entries, and the debits have to equal the credits. So if you know one side of the entry, you can figure out the other side.
Say the problem is "bought land for $100,000 cash," and for some reason you can't remember how to increase land. But you know cash. Everybody knows cash. You spent cash, so cash went down, and cash goes down with a credit. That gives you $100,000 of credits, so you need $100,000 of debits to balance. Land goes on the debit side. Done.
Bought land for $100,000 cash
| Land | 100,000 |
| Cash | 100,000 |
Made a $500 cash sale
| Cash | 500 |
| Sales Revenue | 500 |
Same with the sale: you got cash, so debit cash $500. Forgot how revenue works? Doesn't matter. Put it on the other side so the entry balances. This isn't math, it's a puzzle with two constraints: there are at least two entries, and the debits must equal the credits. Start with the account you're sure of, and the other one falls into place.
Watch the videoNormal Balance Shortcut: Double Entry (12 min)Section VII. If You Must
Memorizing may seem easier at the time, but in the long run it will let you down. When you learn why things happen the way they do, i.e., why expenses are debited or why liabilities are credited, not only will you likely remember it longer, but you can logically figure out things that may have been outside the scope of your memorization. Learning the fundamentals will serve you better every time.
That being said... if you absolutely refuse to learn, it's better that you memorize than not know at all. This acronym can help you remember which accounts are increased with debits:
Debit
Expenses
Assets
Dividends
You'll be DEAD if you forget that you debit expenses, assets, and dividends to increase them. Corny? Absolutely. Will it work? Absolutely. What about credits? Well, if it's not one of those three, it must be a credit, mustn't it? One caveat is that it doesn't handle contra-accounts very well. Use the same logic we used above to get to the solution. Contra-liability: liabilities are not on the DEAD list, so they must be a credit, but we are dealing with a contra-liability, so take the opposite: debit.
Watch the videoNormal Balance Shortcut: DEAD Mnemonic (3 min)Section VIII. Try One Yourself
For each transaction, decide which accounts are debited and credited, and whether each account goes up or down. Then, assuming Cash started at $0, find the ending balance in the Cash T-account.
- Received $5,000 cash from customers for services performed.
- Paid $1,200 for this month's rent.
- Bought $3,000 of supplies on account.
- Paid $2,000 of accounts payable.
- Paid a $500 dividend to shareholders.
- Recorded $800 of depreciation on equipment.
Show the answer
1. Services for cash
| Cash (asset ↑) | 5,000 |
| Service Revenue (revenue ↑) | 5,000 |
2. Paid rent
| Rent Expense (expense ↑) | 1,200 |
| Cash (asset ↓) | 1,200 |
3. Supplies on account
| Supplies (asset ↑) | 3,000 |
| Accounts Payable (liability ↑) | 3,000 |
4. Paid accounts payable
| Accounts Payable (liability ↓) | 2,000 |
| Cash (asset ↓) | 2,000 |
5. Paid a dividend
| Dividends (dividends ↑) | 500 |
| Cash (asset ↓) | 500 |
6. Depreciation
| Depreciation Expense (expense ↑) | 800 |
| Accumulated Depreciation (contra-asset ↑) | 800 |
Number 6 is the sneaky one: accumulated depreciation is a contra-asset, so it goes up with a credit, which is the opposite of a regular asset. Numbers 3 and 6 don't touch cash at all.
| Cash | |
| 5,000 | 1,200 |
| 2,000 | |
| 500 | |
| 1,300 | |
Debits total $5,000 and credits total $3,700, so Cash ends with a $1,300 debit balance. Since debits are the plus side for an asset, that means we have $1,300 of cash.
Keep Going More Practice
- Normal Balances practice problem: pick the normal balance for a list of accounts.
- T/F: T-Account Logic practice problem
- T/F: Liabilities and Equity practice problem
- Account Classification practice problem
- The Accounting Equation: the equation everything in this guide is built on.