🧠This is Part 2 of a two-part series.
If you haven't read the part 1. Here is the link:
If you remember, we ended the last post with a joke about our dear friend Luther. Let’s not be like Luther. Let’s continue.
🎯 Debit or Credit? Let’s Simplify
Whenever you incur an expense, it's recorded on the debit side of an expense account. That’s because you’re increasing the expense. If you were to reduce that expense (like getting a refund), it would appear on the credit side.
So in short:
Increase in Expense ➝ Debit
Decrease in Expense ➝ Credit
Now let’s link this back to something you already understand.
🛠️ Assets Need Fuel (Literally)
By definition, assets are things that help bring cash flow into your business. But to generate cash flow, assets often require expenses.
Let’s say you own a candy store and deliver candies using a van. The van is your asset, but to run it, you need fuel—and that’s an expense.
So, assets don’t operate in a vacuum. They need fuel, rent, electricity, maintenance, etc.—all expenses. These expenses are necessary to use the asset and generate income. That’s one more reason why assets and expenses are both increased by debits.
You pay for an expense → Cash goes out → Bank account is credited
So the fuel expense must be debited
Even if you don’t pay upfront, you’ll pay later. That creates a liability (Accounts Payable).
🧾 Example Entries
1. Fuel expense paid later
- Debit: Fuel Expense
- Credit: A/P – Metro Fuel Station
2. Rent paid upfront via bank transfer
- Debit: Rent Expense
- Credit: Bank
📘 What Have We Learned?
| Type | Increase | Decrease |
|---|---|---|
| Expense | Debit | Credit |
| Asset | Debit | Credit |
For example, if you paid $200 in rent using cash, the asset "cash" decreases by $200. According to the accounting equation (Assets = Liabilities + Capital), this decrease must be balanced. When cash (an asset) decreases, it ultimately reduces the owner's capital by the same amount, because the business has incurred an expense.
Even though expenses aren't directly shown in the accounting equation, they are recorded in the background and their effect reduces the capital.
Now, let's say the rent is due but hasn't been paid yet. Even though no cash has left the business, you still need to record the rent expense. In this case, a liability called "Accounts Payable" is created, which increases. At the same time, capital decreases by the same amount, keeping the accounting equation balanced.
So, what can we learn from this? Expenses typically carry a debit balance. They either decrease an asset (like cash) or increase a liability (like accounts payable), and in both cases, they reduce the owner's capital. This ensures that the accounting equation remains in balance.
Revenue is the opposite of expenses. When revenue increases, it is credited, and when it decreases, it is debited. That's why we enter sales on the credit side of the T-account. Revenue is a collective term for sales and is recorded on the credit side until it is transferred to the income statement.
Let's look at it from another perspective. Suppose you own the business—whatever profit the business earns belongs to you. This profit increases the capital you have invested in the business. If an increase in capital is credited, then anything that increases the value of capital should also be credited. Profit is an increase, so it is credited. On the other hand, if profit decreases, it means expenses have occurred. Since expenses reduce profit, and the opposite of credit is debit, expenses are therefore debited when they occur.
Examples:
1. Rent of $100 is paid in cash.
This transaction indicates that an expense needs to be recorded.
Debit - Rent Expense $100 (Increase in expense)
Credit - Cash $100 (Decrease in asset)
2. Electricity expense of $500 is paid by cheque.
This transaction indicates that an expense needs to be recorded.
Debit - Electricity Expense $500 (Increase in expense)
Credit - Bank $500 (Decrease in asset)
3. $100 received as consultancy fee earned by the business.This transaction reflects revenue earned.
Debit – Cash $100 (increase in asset)
Credit – Consultancy Revenue $100 (increase in revenue)
See the following transactions and their effects on the accounts.
Let's create individual T-accounts for each of the above transactions.
💵 Drawings
Because drawings reduce profit (and therefore capital), the Drawings account carries a debit balance. The other side of the transaction affects the business’s bank balance, so a credit entry is made to the Bank account, ensuring the accounting equation remains balanced.
You might wonder, why not just reduce the capital account directly? The reason is that the capital account would become cluttered with frequent transactions every time the owner takes money out of the business. To avoid this, we create a separate Drawings account.
Remember: Drawings are not expenses. They represent a reduction in the owner's equity, not a cost to the business.
Let's understand this with the example below.
On Sep 24, John takes $250 out of the business for his personal use.
What effects will be on and the actions.
1. Capital will decrease by $250 (Debit the drawings account by $250)
2. Bank balance will decrease by $250 (Credit the bank account by $250)
T-accounts will look like as follows
Sometimes, owners take goods from the business for personal use. For example, let's say John takes stock worth $160 for his personal use on 24th December. In this case, we will debit the Drawings account because the owner's capital has decreased. At the same time, we will credit the Purchases account.
When stock is purchased for the business, the Purchases account is debited. However, when stock is taken out for personal use, it is no longer a business expense, so we reverse the entry by crediting the Purchases account.
1. Capital and stock will decrease by $160. So, debit the Capital (or Drawings) account and credit the Stock account.
2. Alternatively, you can debit the Drawings account and credit the Purchases account for $160.
The T-accounts will look as follows:
So, we’ve discussed debits, credits, and T-accounts in this blog post. This is one of the most fundamental building blocks of accounting. If you truly understand the double-entry concept and how the accounting equation works, you’ll have a strong foundation—and you’ll rarely go wrong with your entries.
Keep practicing and revisiting the rules we covered here and in Part 1 of this blog series. The more you apply them, the more natural it will become.
Wishing you the best in your accounting journey!
Disclaimer: Some images in this blog are generated using artificial intelligence (AI) for illustrative purposes.
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