1.4 Rules of Debit (DR) and Credit (CR)

A debit records financial information on the left side of each account. A credit records financial information on the right side of an account. One side of each ... Skiptocontent   Eachaccountcanberepresentedvisuallybysplittingtheaccountintoleftandrightsidesasshown.Thisgraphicrepresentationofageneralledgeraccountisknownasa T-account. AT-accountiscalleda“T-account”becauseitlookslikea“T,”asyoucanseewiththeT-accountshownhere.   Figure1.4ArepresentationofaT-account.RiceUniversity.Source:OpenstaxCCBYNC-SALongDescription A debit recordsfinancialinformationontheleftsideofeachaccount.A credit recordsfinancialinformationontherightsideofanaccount.Onesideofeachaccountwillincreaseandtheothersidewilldecrease.The endingaccountbalance isfoundbycalculatingthedifferencebetweendebitsandcreditsforeachaccount.Youwilloftenseetheterms debit and credit representedinshorthand,writtenas DR or dr and CR or cr,respectively.Dependingontheaccounttype,thesidesthatincreaseanddecreasemayvary.   Wecanillustrateeachaccounttypeanditscorrespondingdebitandcrediteffectsintheformofan expandedaccountingequation.   Figure1.5Arepresentationoftheexpandedaccountingequation.RiceUniversity.Source:OpenstaxCCBYNC-SALongDescription Aswecanseefromthisexpandedaccountingequation,Assetsaccountsincreaseonthedebitsideanddecreaseonthecreditside.ThisisalsotrueofDividendsandExpensesaccounts.Liabilitiesincreaseonthecreditsideanddecreaseonthedebitside.ThisisalsotrueofCommonStockandRevenuesaccounts.Thisbecomeseasiertounderstandasyoubecomefamiliarwiththe normalbalance ofanaccount. NormalBalanceofanAccount The normalbalanceistheexpectedbalanceeachaccounttypemaintains,whichisthesidethatincreases.Asassetsandexpensesincreaseonthedebitside,theirnormalbalanceisadebit.Dividendspaidtoshareholdersalsohaveanormalbalancethatisadebitentry.Sinceliabilities,equity(suchascommonstock),andrevenuesincreasewithacredit,their“normal”balanceisacredit.Table1.1showsthenormalbalancesandincreasesforeachaccounttype. Table1.1AccountNormalBalancesandIncreasesBy:RiceUniversityOpenStaxCCBY-NC-SA4.0 Typeofaccount Increaseswith Normalbalance Asset Debit Debit Liability Credit Credit CommonStock Credit Credit Dividends Debit Debit Revenue Credit Credit Expense Debit Debit Whenanaccountproducesabalancethatiscontrarytowhattheexpectednormalbalanceofthataccountis,thisaccounthasan abnormalbalance.Let’sconsiderthefollowingexampletobetterunderstandabnormalbalances. Let’ssaytherewereacreditof$4,000andadebitof$6,000intheAccountsPayableaccount.SinceAccountsPayableincreasesonthecreditside,onewouldexpectanormalbalanceonthecreditside.However,thedifferencebetweenthetwofiguresinthiscasewouldbeadebitbalanceof$2,000,whichisanabnormalbalance.Thissituationcouldpossiblyoccurwithanoverpaymenttoasupplieroranerrorinrecording. LongDescriptions ArepresentationofaT-account.Thereisahorizontallineacrossthecenter,abovewhichisthelabelAccountTitle(suchasCashorAccountsPayable).Thereisashortverticallineextendingbelowthecenterofthehorizontalline.ThespacetotheleftoftheverticallineislabeledDebit.ThespacetotherightoftheverticallineislabeledCredit.Return Arepresentationoftheexpandedaccountingequationdividedintoanupperandlowersection.Theuppersectionreads,fromlefttoright,AssetsequalLiabilitiesplusEquity.Equityisabovealonghorizontallinebelowwhichislabeled,fromlefttoright,CommonStockminusDividendsplusRevenuesminusExpenses.ThelowersectioncontainssixT-accountsthatarearrangedunderthelabelsintheuppersection.ThetopofeachT-accountislabeledDebitontheleftsideandCreditontherightside.TheT-accountbelowAssetsislabeledIncreaseontheleftandDecreaseontheright.TheT-accountbelowLiabilitiesislabeledDecreaseontheleftandIncreaseontheright.TheT-accountbelowCommonStockislabeledDecreaseontheleftandIncreaseontheright.TheT-accountbelowDividendsislabeledIncreaseontheleftandDecreaseontheright.TheT-accountbelowRevenuesislabeledDecreaseontheleftandIncreaseontheright.TheT-accountbelowExpensesislabeledIncreaseontheleftandDecreaseontheright.Return Previous/nextnavigation Previous:1.3Current&NoncurrentAssets&Liabilities Next:1.5TransactionAnalysis-fromaccountingequationtojournalentries Backtotop License FinancialandManagerialAccountingbyLolitaPaffislicensedunderaCreativeCommonsAttribution-NonCommercial-ShareAlike4.0InternationalLicense,exceptwhereotherwisenoted. ShareThisBook ShareonTwitter