In accounting, T-Accounts have a natural balance side.
This relates to the basic accounting equation:
Assets = Liabilities + Stockholders’ Equity
Assets have a natural balance on the Debit side of the T-Account. When the balance of Assets is increased, the entry is placed into the debit (left) side of the account. Cash coming in is always a debit as is any other asset being acquired: Accounts Receivable, Equipment, Property, Plant, Investments, and Inventory. Reductions in assets are placed on the credit (right) side of the T-Account, such as when cash is paid out.
A credit balance on an asset account would indicate a problem with the T-Account. Why? An asset with a balance on the credit side would indicate a negative asset. What is negative cash? This cannot exist in accounting as a balance on the credit side would be indicative of a liability rather than as an asset. The same is true for equipment as a credit balance would indicate that the equipment's value is less than zero. Can an Account Receivable be negative? This would indicate that someone overpaid their invoice and therefore is entitled to a refund, therefore a credit balance in the Account Receivables could be considered a liability.
A credit balance on an asset account would indicate a problem with the T-Account. Why? An asset with a balance on the credit side would indicate a negative asset. What is negative cash? This cannot exist in accounting as a balance on the credit side would be indicative of a liability rather than as an asset. The same is true for equipment as a credit balance would indicate that the equipment's value is less than zero. Can an Account Receivable be negative? This would indicate that someone overpaid their invoice and therefore is entitled to a refund, therefore a credit balance in the Account Receivables could be considered a liability.
Liabilities have a natural balance on the Credit (right) side of the T-Account. When liabilities are increasing such as Accounts Payable, the T-Account is credited with the transaction. When a liability is paid, a debit is entered to reduce the balance of the account.
Stockholders’ Equity or SE has a natural balance on the Credit side of the T-Account. When stock is purchased by an investor, the cash received by the company is debited as it increases the cash asset; in turn the common stock account is credited.
Retained Earnings has a natural Credit balance as most companies hope to earn a profit. Should the balance be on the Debit side that would indicate the company is losing money.
Dividends have a normal balance of on the Debit side.
Why? Because cash was used to pay the dividend and the dividends paid also reduce Retained Earnings.
Expenses have a normal balance on the Debit side.
Why? When cash was paid or liabilities were incurred those transactions were recorded on the Credit Side. To balance the accounting equation, expenses must be entered on the debit side.
Revenues have a normal balance on the Credit side.
Why? When cash was received or an Accounts Receivable was earned, those entries are Debits, therefore, to balance the accounting equation, revenues must be entered on the credit side.
