Debit Balance vs Credit Balance
In accounting, a system called ‘double entry’ is used to record business transactions. The double entry system of recording requires two entries to be made in the accounting books of a firm; where one entry will be a debit entry and the other will be a credit entry of an equal amount. Once the accounting books are balanced the accounts will have either a debit or a credit entry. The following article provides an explanation of the credit and debit entries made in a double entry system, which types of accounts will have a debit or credit balance, and clearly explains the difference between a debit and credit balance.
Debit Balance
The general ledger contains a number of accounts referred to as ‘T accounts’ in which each account represents some form of income, expense, asset, liability, capital, dividends, etc. The firm will record business transactions in the T accounts in its ledgers and will make debit and credit entries in accordance with the recording principles in accounting. Debit entries in a T account will always be recorded in the left side. When an account is balanced with its debit and credit entries, if the account has a higher balance on its left side, the account is said to have a debit balance.
According to the accounting principles and double entry concepts, there are a number of items that are supposed to have a debit balance at the end of the reporting period. These items include assets, expenses and losses. For such accounts, when the value of the asset, expenses, or loss increases, entries will be made onto the debit (left side) of the T account, and as these values decrease, the entries will be made to the credit (right side). However, the balance for assets, expenses and losses will always be on the debit side.
Credit Balance
Just as debt entries are made, for a transaction to be recorded completely, a credit entry should also be made. The credit entry will also be made on the T accounts and credit balances are usually entered on the right hand side. Once the account is balanced with their debit and credit entries, if the account has a higher balance on its right side, the account is said to have a credit balance.
Just as in debit balances, there are also a number of items that will always have a credit balance once accounts are balanced. Such items include liabilities, income, and owner’s equity. Since the same concept applies for credit balances, when liabilities, income, or owner’s equity increases, entries will be made on the account’s right side, and entries will be made on the left side as they reduce.
Debit vs Credit Balance
The double entry system requires that a debit and credit entry of equal amount be made for a transaction to be recorded completely. A debit and credit balance arises once all these debit and credit entries made on a T account are balanced. The main difference between these two balances is that, a debit balance will appear on an account that is an asset, expense or loss, and a credit balance will appear on an account that is a liability, income, or capital account.
Summary:
• The double entry system requires that a debit and credit entry of equal amount be made for a transaction to be recorded completely.
• The firm will record business transactions in the T accounts in its ledgers and will make debit and credit entries in accordance with the recording principles in accounting.
• Once balanced, if the account has a balance on its left side the account is said to have a debit balance, and if the account has a balance on its right side, the account is said to have a credit balance.