Instead, his liabilities account would increase.Īs you can see, Bob’s liabilities account is credited (increased) and his vehicles account is debited (increased). Bob’s vehicle account would still increase by $5,000, but his cash would not decrease because he is paying with a loan.
Now let’s take the same example as above except let’s assume Bob paid for the truck by taking out a loan. Bob would record this entry like this:Īs you can see, Bob’s cash is credited (decreased) and his vehicles account is debited (increased). Bob’s cash is being reduced by the $5,000 and his fixed assets are being increased by $5,000. Bob purchases the new truck for $5,000, so he writes a check to the car company and receives the truck in exchange. Bob’s Furniture needs to buy a new delivery truck because their current truck is started to fall apart. For example, accumulated depreciation is a contra asset account that reduces a fixed asset account. These accounts are used to reduce normal accounts. For instance, a contra asset account has a credit balance and a contra equity account has a debit balance. Well, what is an un-normal account? Contra accounts are accounts that have an opposite debit or credit balance. Notice I said that all “normal” accounts above behave that way. This means that equity accounts are increased by credits and decreased by debits. Equity AccountsĮquity accounts like retained earnings and common stock also have a credit balances. Liabilities are increased by credits and decreased by debits. In other words, these accounts have a positive balance on the right side of a T-Account. LiabilitiesĪll normal liabilities have a credit balance. Assets are increased by debits and decreased by credits. This means that asset accounts with a positive balance are always reported on the left side of a T-Account. AssetsĪll normal asset accounts have a debit balance. Here are the main three types of accounts. Each account is assigned either a debit balance or credit balance based on which side of the accounting equation it falls. There are several different types of accounts in an accounting system. Instead, they reflect account balances and their relationship in the accounting equation.ĭebit and Credit Accounts and Their Balances So debits and credits don’t actually mean plusses and minuses. Thus, debit entries are always recorded on the left and credit entries are always recorded on the right. If you will notice, debit accounts are always shown on the left side of the accounting equation while credit accounts are shown on the right side.
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