According to the accounting principle, the transaction entry indicating the use of funds (or its destination) is always made on the debit side of the account and an entry indicating the source of funds is made on the credit side of the other account.
Debit = Use of funds (Destination)
Credit = Source of funds
Business transactions cause a constant change in account balances, while either increasing or decreasing the balance.
When dealing with the groups of accounts, it has been agreed that if the amount of money increases (receipts) this have to be recorded on the debit side of the Cash account, and the decrease in amount (payments) on the credit side of this account. Cash refers to an asset account. At the same time, it follows from this principle that if the money has increased due to, for example, a loan received or the owner's investment, then increase in capital will be recorded on the credit side of the Equity account and decrease in capital on its debit side.
This bookkeeping principle also states that increases in expenditure are recorded on the debit side of expenditure accounts and any decreases in expenditure on the credit side, and that increases in revenue are recorded on the credit side of revenue accounts and decreases in revenue are recorded on the debit side of those accounts.
Thus, an accounting recording principle leads to the following account group-specific recording rules:
- Asset accounts - a debit increases the balance of an account and a credit decreases it.
- Liability accounts - a debit decreases the balance and a credit increases it.
- Equity accounts (Capital accounts) - a debit decreases the balance and a credit increases the balance.
- Revenue accounts (Income accounts) - a debit decreases the balance and a credit increases it.
- Expense accounts (Expenditure accounts) - a debit increases the balance and a credit decreases the balance.
| Account classification | Commonly accepted normal balance | To Increase balance | To Decrease balance |
|---|---|---|---|
| Assets | Debit | Debit | Credit |
| Liabilities | Credit | Credit | Debit |
| Capital (Equity) | Credit | Credit | Debit |
| Income (Revenue) | Credit | Credit | Debit |
| Expense | Debit | Debit | Credit |
A commonly accepted "normal balance” is the expectation that a particular type of account has to have either a debit or a credit balance according to an account classification. It indicates the typical balance (debit or credit) for the specified account.
As it can be seen from the table presented above, the side that increases the balance (debit or credit) refers to as an account's normal balance.