Debits, credits, and the trial balance
Which side of an account increases, and how a trial balance tells you the books are at least in balance.
Five account types, two directions
Every line in a small-business ledger is a debit or a credit. The words are not “good” and “bad.” They are the left side and the right side. Which side increases an account depends on the type. Assets and expenses increase with debits. Liabilities, equity, and income increase with credits. A cash sale of $100 debits cash and credits revenue. A $40 supply purchase debits supplies expense and credits cash. Both entries balance. Neither one is a tax position.
A short sequence
- Name the account type. Cash is an asset. Revenue is income. A loan is a liability. A draw is equity. Rent is an expense. The starter chart is a list of names already sorted this way.
- Debit what increased on the left. Assets and expenses grow with a debit. If cash went up, debit cash.
- Credit what increased on the right. Liabilities, equity, and income grow with a credit. If you earned the sale, credit revenue. If you borrowed, credit the loan.
- Keep the entry in balance. The debits on a journal line equal the credits. A one-sided entry is a broken entry, not a shortcut.
- List every account in a trial balance. Add the debit balances. Add the credit balances. They match. If they do not, stop and find the entry. A trial balance that matches can still have the wrong account: rent posted to supplies still balances.
Normal balances you can memorize once
| Type | Increases with | Typical balance |
|---|---|---|
| Asset | Debit | Debit |
| Expense | Debit | Debit |
| Liability | Credit | Credit |
| Equity | Credit | Credit |
| Income | Credit | Credit |
Contra accounts sit against their parent. Accumulated depreciation is a credit balance that reduces equipment. A sales return can be a debit that reduces revenue. Owner’s draws are often a debit against equity. The balance sheet still has to satisfy assets = liabilities + equity after those contras. The profit and loss is the income and expense accounts before you close them.
What a balanced trial balance does not prove
It does not prove you reconciled the bank. It does not prove the method is the one you think you are using. It does not prove a prepaid was spread with the prepaid schedule or that a loan payment was split with the payment calculator. It proves the sides match. The month-end close is the rest of the proof.