Is Debit on the Left or Right Side of an Account?

Accounting relies on a fundamental system where every financial event affects at least two accounts. This approach, known as double-entry accounting, ensures that the accounting equation—Assets = Liabilities + Equity—always remains balanced. Debits and credits are the two sides of every transaction, acting as the foundational elements for financial record-keeping. They provide the structure for tracking how money moves within a business and preparing accurate financial statements. This system is the only bookkeeping method that complies with U.S. Generally Accepted Accounting Principles (GAAP).

Understanding Debit and Credit Placement

In the double-entry accounting system, debits are recorded on the left side of an account, and credits are placed on the right side. This standard positioning is often visualized using a “T-account,” a graphic representation of a ledger account shaped like the letter “T.” The vertical line of the “T” separates the left (debit) side from the right (credit) side, while the horizontal line forms the top, where the account name is listed. This convention simplifies the recording and review of financial transactions, providing clarity and consistency.

How Debits and Credits Affect Account Balances

The impact of debits and credits on an account balance depends on the account type. For asset accounts, such as cash or equipment, a debit increases the balance, while a credit decreases it. When a business purchases supplies with cash, for example, the supplies (an asset) would be debited to increase their balance, and cash (another asset) would be credited to decrease its balance.

For liability accounts, like accounts payable or loans, debits decrease the balance, and credits increase it. If a business takes out a loan, the cash account (an asset) would be debited, and the loans payable account (a liability) would be credited, increasing the amount owed. Similarly, for equity accounts, which represent the owners’ stake in the business, debits decrease the balance, and credits increase it.

Revenue accounts, reflecting income generated from business activities, operate similarly to liabilities and equity; debits decrease them, and credits increase them. For instance, when a service is provided and cash is received, the cash account (asset) is debited, and the service revenue account is credited. Conversely, expense accounts, representing costs incurred to generate revenue, increase with a debit and decrease with a credit. Paying rent, for example, involves a debit to the rent expense account and a credit to the cash account.

The IRS requires businesses to keep records that clearly show income and expenses, with supporting documents like invoices and receipts essential for verification. Businesses should generally retain tax records for at least three years, with longer periods required for certain situations like substantial error or employment taxes.