Page 70 - Accounting Principles (A Business Perspective)

This book is licensed under a Creative Commons Attribution 3.0 License

If, on the other hand, the sum of the credits exceeds the sum of the debits, the account has a credit balance.
For instance, assume that a company has an Accounts Payable account with a total of USD 10,000 in debits and
USD 13,000 in credits. The account has a credit balance of USD 3,000, as shown in the following T-account:

(Dr.) Accounts Payable (Cr)
10,000 7,000
6,000
10,000 13,000

Cr. bal 3,000
Normal balances Since debits increase asset, expense, and Dividend accounts, they normally have debit (or
left-side) balances. Conversely, because credits increase liability, capital stock, retained earnings, and revenue
accounts, they normally have credit (or right-side) balances.
The following chart shows the normal balances of the seven accounts we have used:

Normal Balances
Types of Accounts Debit Credit
Assets X
Liabilities X
Stockholders' Equity
Capital Stock X
Retained earnings X
Dividends X
Expenses X
Revenues X

At this point, you should memorize the six rules of debit and credit. Later, as you proceed in your study of
accounting, the rules will become automatic. Then, you will no longer ask yourself, "Is this increase a debit or
credit?"
Asset accounts increase on the debit side, while liability and stockholders' equity accounts increase on the credit
side. When the account balances are totaled, they conform to the following independent equations:
Assets = Liabilities + Stockholders' Equity
Debits = Credits

The arrangement of these two formulas gives the first three rules of debit and credit:
• Increases in asset accounts are debits; decreases are credits.
• Decreases in liability accounts are debits; increases are credits.
• Decreases in stockholders' equity accounts are debits; increases are credits.

Accounting Principles: A Business Perspective 71 A Global Text