The Normal Balance of Accounts

The accounting equation is divided into two sides (left and right) which are accounted to always maintain a
balanced amount.

In other words, if the SFP is constructed immediately after each transaction, it should always be that the total
assets must be equal to the totals of the aggregate liabilities and owner’ equity.

Normal Balance of Statement of Financial Position Accounts

DEBIT = CREDIT

Assets
Debit means the value received. Assets
are initially recorded on the debit side of
the equation. To debit an asset is to
increase an asset. To credit an asset is to
decrease it
= Liabilities
And Capital
Credit means the value parted with.
Liabilities and Capital are initially
recorded on the credit side of the
equation. To credit a liability and/or
capital is to increase them. To debit
liability and/or capital means to
decrease them.

Normal Balance of Statement Comprehensive Income

DEBIT = CREDIT

Expense = Revenue

Expenses are initially recorded on the Revenues are initially recorded on the
debit side. To debit an expense means to credit side. To credit revenue means to
increase an expense. To credit an expense increase an income. To debit revenue
is to decrease it means to decrease it.

The “two sides” of the accounting equation is an application of the dual aspect concept which provides that every
value received must have a corresponding value parted with. This concept is the basis of the debit and credit in
recording economic transactions and event.

The two equal sides define the foundation of the rules of debit and credit.
 THE RULES OF DEBIT AND CREDIT
The rules of debit and credit are based on the normal balance of an accounting element or account. The term
“normal balance of an account” refers to the usual position of an account in the T-account.

Asset accounts are normally in the debit side while the liability and owner’s capital accounts are normally in the
credit side.

The normal balance of an account provides the basis in analyzing when to debit and credit an account. The
following rules must be observed when to debit or credit an asset, liability, and capital accounts.

Rule 1 – Assets: Debit to increase the amount of asset.

Credit to decrease its amount.

Asset Account
Debit Credit

Increases Decreases

To illustrate, assume the following information:

1. January 5, Pearl Services bought P 3,000 worth of supplies on account.

2. Pearl used P 2,500 worth of supplies during the month.

The remaining unused supplies at the end of the month amount to P 500. Using the T-account method, the analysis
would be as follows:

Unused Supplies
Increase decrease
Debit Credit

1/5 3,000 1/30 2,500

1/30 500

Remaining balance of
unused supplies
Rule 2 – Liability: Credit to increase the amount of liability.
Debit to decrease its amount.

Liability Account

Debit Credit

Decrease Increase

To illustrate, assume the following information:

1. January 5 – Pearl Services bought P 3,000 worth of supplies on account.

2. January 18 – Pear paid 1,800 for the said obligation.

After the partial payment, the remaining accounts payable decreases to 1,200. Using the T-account method, the
analysis would be as follows:

Accounts payable
Increase
Decrease
Debit Credit

1/18 1,800 1/5 3,000

1,200

Remaining balance of accounts payable

Rule 3 : Owner’s Equity: Credit to increase the capital account;
Debit to decrease its amount

Owner’s Equity Account

Debit Credit

Decrease Increase

To illustrate: assume the following information.

1. January 1 – J. Pearl invested 90,000 cash into his business.

2. June 1 – J. Pearl withdrew 60,000 cash as permanent withdrawal from the business.

The remaining balance of capital after the permanent withdrawal by the owner amounts to
30,000. Using the T-account method, the analysis would be:

J. Pearl, Capital
Decrease Decrease
Debit Credit

6/1 60,000 1/1 90,000

30,000

Remaining balance of
accounts payable
Rule 4 Revenue: Credit to increase the revenue account.
Debit to decrease its amount.

Revenue Account

Debit Credit

Decrease Increase

To illustrate: assume the following information.

1. December 1 – Pearl Service recorded service income of 10,000 cash.

2. December 31 – Pearl determined that the recorded service income on December 31 should not be 10,000. The
correct amount is 1,000. Pearl reduced the service income by 9,000.

Observe that the remaining balance of service income account after decreasing it by 9,000 is the correct amount of
1,000.

Using the T-account method, the analysis would be as follows:

Decrease Increase
Debit Credit

12/31 9,000 12/1 10,000

1,000

Remaining correct balance of

revenue
Rule 5 Expense: Debit to increase the expense account.
Credit to decrease its amount.

Expense Account

Debit Credit

Increase Decrease

To illustrate: assume the following information.

1. December 1 – Pearl Service recorded service income of 10,000 cash.

2. December 31 – Pearl determined that the recorded service income on December 31 should not be 10,000. The
correct amount is 1,000. Pearl reduced the service income by 9,000.

Observe that the remaining balance of service income account after decreasing it by 9,000 is the correct amount of
1,000.

Using the T-account method, the analysis would be as follows:

Increase Rent Expense

Debit Credit Decrease

12/31 12,000 12/1 10,800

1,200

Remaining correct balance of

revenue