Apply the rules of debit and credit to the five elements and identify the normal balance of each account

What this dot point is asking

SEAB wants you to apply the rules of debit and credit to the five elements and to state the normal balance of each kind of account. This is the grammar of double entry: once you know which side records an increase for each element, you can record any transaction. The central insight is that "debit" and "credit" are simply the left and right sides of an account; whether a debit increases or decreases an item depends entirely on what type of element the account is.

The answer

Debit and credit are sides, not values

Every ledger account has two sides: debit on the left and credit on the right. A debit is not "good" and a credit is not "bad". Each element has a natural side on which an increase is recorded.

The rules for the five elements

The DEAD CLIC memory aid

A reliable way to remember which side records an increase:

• DEAD - Debit increases Expenses, Assets and Drawings.
• CLIC - Credit increases Liabilities, Income and Capital.

So when an asset, expense or drawings goes up, you debit; when a liability, income or capital goes up, you credit. To record a decrease, you use the opposite side.

Normal balances

The normal balance is the side on which an account usually has its balance, which is its increase side. Assets, expenses and drawings normally have debit balances; liabilities, income and capital normally have credit balances. This is why, when a trial balance is drawn up, the debit and credit columns should agree.

Examples in context

Example 1. Receiving money owed. A customer who bought on credit pays \600$ by cheque. Bank (asset) goes up, so it is debited; the customer's account (a receivable asset) goes down, so it is credited. The debit-credit rule for assets - up on debit, down on credit - handles both sides of this single event correctly.

Example 2. Recording an expense on credit. A business receives an electricity bill of \250$ but has not yet paid it. Electricity (expense) goes up, so it is debited; a payable (liability) is created, so it is credited. Even though no cash moves, the rules still apply: the expense is recognised and a liability recorded.

Try this

Q1. State which side increases each: an asset, a liability, an expense. [3 marks]

• Cue. Asset increases on the debit side; liability increases on the credit side; expense increases on the debit side.

Q2. Give the debit and credit for buying inventory of \1,500$ on credit from Tan. [2 marks]

• Cue. Debit Purchases \1,500$; Credit Tan (trade payable)$\$1\,500$.

Q3. State the normal balance of capital and of rent expense, and explain why they differ. [3 marks]

• Cue. Capital has a normal credit balance because equity increases on the credit side; rent expense has a normal debit balance because expenses increase on the debit side.