At first glance, the meaning of these terms seems obvious. However, in double-entry accounting, these terms are used differently than you may be used to. An increase in Income increases Retained Earnings. An increase in Retained Earnings is a credit.

You will often see the termsdebitandcreditrepresented in shorthand, written asDRordrandCRorcr, respectively. Depending on the account type, the sides that increase and decrease may vary. Asset, liability, and most owner/stockholder equity accounts are referred to as permanent accounts . Permanent accounts are not closed at the end of the accounting year; What Is the Accounting Equation, and How Do You Calculate It their balances are automatically carried forward to the next accounting year. To show how the debit and credit process works within IU’s general ledger, the following image was pulled from the IUIE database. Employees who are responsible for their entity’s accounting activities will see a file such as the one below on more of a day-to-day basis.

What is the Normal Balance for Expense Accounts?

If revenues exceed expenses then net income is positive and a credit balance. If expenses exceed revenues, then net income is negative and has a debit balance. Since cash was paid out, the asset account Cash is credited and another account needs to be debited. Because the rent payment will be used up in the current period it is considered to be an expense, and Rent Expense is debited. If the payment was made on June 1 for a future month the debit would go to the asset account Prepaid Rent.

Below is a basic example of a debit and credit journal entry within a general ledger. A normal balance is the side of the T-account where the balance is normally found. When an amount is accounted for on its normal balance side, it increases that account. On the contrary, when an amount is accounted for on the opposite side of its normal balance, it decreases that amount.

Normal Balance For Accounts Payable

In a T-format account, the left side is the debit side and the right side is the credit side. Liabilities normally carry a credit balance while assets carry a debit balance. Expenses carry a debit balance while incomes carry a credit balance.