Debit, credit, and the chart of accounts

Learning goals

• Use account classification and direction to choose debit or credit.
• State normal balances for assets, liabilities, capital, revenue, expenses, and drawings.
• Build a logical chart of accounts.
• Explain why total debits equal total credits in every complete entry.

Prerequisite check

Classify Cash, Accounts Payable, Capital, Revenue, Rent Expense, and Drawings. State whether each normally increases or decreases owner's equity.

Vocabulary

• Debit (Dr): the left side of an account.
• Credit (Cr): the right side of an account.
• Normal balance: the side on which an account normally increases and carries a positive balance.
• T-account: a simple account diagram with debit on the left and credit on the right.
• Chart of accounts: the organized list of account names and numbers used by a business.
• Contra account: an account that offsets a related account and normally has the opposite balance.

Core idea

Debit and credit mean left and right—not good and bad, not cash in and cash out, and not bank-card language. Classify the account, decide whether it increases or decreases, then choose the side.

Why this treatment makes sense

The debit-credit system preserves the accounting equation. Asset increases are placed on the left; liability and capital increases are placed on the right. Expenses and drawings reduce equity, so their increases use the side opposite capital. Revenue increases equity, so it follows capital's credit side.

A repeatable method

Use CIDER:

1. C — Classify each account.
2. I — Increase or decrease each one.
3. D — Debit side or credit side from the rules.
4. E — Equal entry: total debits must equal total credits.
5. R — Reasonableness: read the entry back as the transaction story.

Worked example

Northwind Web Care has this partial chart:

• 101 Cash
• 110 Accounts Receivable
• 150 Equipment
• 201 Accounts Payable
• 210 Bank Loan
• 301 Noor, Capital
• 302 Noor, Drawings
• 401 Service Revenue
• 510 Rent Expense
• 520 Utilities Expense

Analyse four transactions:

1. Buy equipment on account, $3,600: Equipment increases → Dr $3,600; Accounts Payable increases → Cr $3,600.
2. Pay rent, $900: Rent Expense increases → Dr $900; Cash decreases → Cr $900.
3. Earn service revenue for cash, $1,400: Cash increases → Dr $1,400; Service Revenue increases → Cr $1,400.
4. Owner withdraws $250: Drawings increases → Dr $250; Cash decreases → Cr $250.

Equation check: the equipment/payable entry adds equal asset and liability amounts. Rent and drawings reduce assets and equity. Revenue increases both assets and equity.

Journal, ledger, and statement connection

The chart of accounts keeps journal and ledger naming consistent. Each journal entry later posts debits to the left and credits to the right of ledger accounts. Asset, liability, and capital balances reach the balance sheet; revenue and expenses reach the income statement; Drawings reaches owner's equity.

Common mistakes

• Memorizing “cash received is a debit and cash paid is an expense.” The other account depends on why cash moved.
• Believing debit always means increase. It decreases liabilities, capital, and revenue.
• Crediting Expense because an expense reduces equity. The expense account increases with a debit.
• Creating a new account title for each supplier instead of using Accounts Payable in the general ledger unless a subsidiary system is specified.
• Choosing account numbers before deciding classifications.

Guided practice

State the debit and credit for each event.

1. Perform $2,200 of work on account.
2. Collect $800 from a customer who already owed the business.
3. Pay $500 toward Accounts Payable.
4. Receive a $4,000 bank loan.
5. Owner invests equipment valued by supported agreement at $2,500.

Independent practice

Create a numbered chart of accounts for Lakeshore Language Services with Cash, Accounts Receivable, Supplies, Prepaid Insurance, Equipment, Accounts Payable, Unearned Revenue, Bank Loan, J. Patel Capital, J. Patel Drawings, Lesson Revenue, Rent Expense, Wages Expense, and Internet Expense. Then analyse:

• receive $1,200 cash before lessons are provided;
• use $300 of services previously paid in advance;
• pay $450 wages;
• buy $700 supplies for cash.

Self-check and solutions

Guided practice:

1. Dr Accounts Receivable $2,200; Cr Service Revenue $2,200.
2. Dr Cash $800; Cr Accounts Receivable $800. No new revenue.
3. Dr Accounts Payable $500; Cr Cash $500. No new expense.
4. Dr Cash $4,000; Cr Bank Loan $4,000.
5. Dr Equipment $2,500; Cr Owner, Capital $2,500.

Independent practice: A logical chart uses asset numbers in the 100s, liabilities 200s, equity 300s, revenue 400s, and expenses 500s; exact numbers may vary but must be unique and consistent. Entries: Dr Cash $1,200 / Cr Unearned Revenue $1,200; Dr Unearned Revenue $300 / Cr Lesson Revenue $300; Dr Wages Expense $450 / Cr Cash $450; Dr Supplies $700 / Cr Cash $700.

Retrieval practice

Recreate the normal-balance table without notes. Explain in words why Expense and Drawings normally have debit balances.

Exam-style application

An entry debits Cash $2,600 and credits Service Revenue $2,600. Give three different transaction stories that also debit Cash $2,600 but require a different credit account.

Answer outline: Owner investment → credit Capital; bank borrowing → credit Bank Loan; collection of an existing customer balance → credit Accounts Receivable; customer deposit before earning → credit Unearned Revenue. Cash direction alone cannot choose the credit.

Lesson summary

Debit and credit are account directions. Correct entries come from classification and increase/decrease reasoning, not from memorizing cash patterns.