Making sense of debit and credit: Why assets and expenses increase on the left

Many people start their journey into business or accounting feeling completely lost. You might look at a bank statement and see that a “credit” means you have more money, but then you open an accounting textbook and it tells you that “debiting” your cash account is how you record an increase. This creates a massive cloud of confusion for students and small business owners alike. The problem is that most people only focus on the physical movement of paper money or digital coins. They do not see the invisible exchange of value that happens every time a business breathes. When you only look at the money, you miss half of the story.

This confusion often leads to messy books and poor business decisions. A small business owner might take a laptop from the shop floor to give to their child or use the company van for a weekend trip to the beach. In their mind, no money changed hands, so they think nothing happened. However, in the world of accounting, something very important happened. An asset or a service was used up. Because they do not understand that every “in” must have an “out”, their financial records become a fiction rather than a fact. Understanding why certain items sit on the left or the right of a T account is the key to clearing this fog.

15 Solutions to master the double entry system and T accounts

1. Recognise that every transaction is a two way street

The first step to clarity is realising that a business never does anything in isolation. Every single time something happens in your business, two things are affected. If you buy a bag of flour for your bakery, the flour comes in and the money goes out. You cannot have the flour without losing the money. This is the heart of the double entry system. It is a scales system that must always stay level.

When you look at a T account, the left side is called the debit side and the right side is called the credit side. These are just names for the two seats on a seesaw. If you put weight on the left seat, you must understand where that weight came from. By training your brain to look for the second half of every story, you stop seeing accounting as a list of numbers and start seeing it as a map of movements.

2. Understand that assets and expenses are both types of value coming in

Many students struggle to see why a new delivery van and a monthly internet bill are treated the same way on the left side of a T account. The secret is that both represent value flowing into the business. When you buy a van, you are bringing a physical tool into your company. When you pay for the internet, you are bringing a digital service into your company. Both are “goods” or “benefits” that you now possess to help you make money.

Because both assets and expenses represent a benefit that the business has received, they both increase on the left side. Think of the left side of the T account as the “receiving” side for things that help your business operate. Whether it is a tangible desk you can touch or an intangible electricity service that keeps the lights on, the business is “getting” something. That is why they are grouped together in how we record their growth.

3. Visualise the difference between a permanent asset and a temporary expense

While assets and expenses both increase on the debit side, they have one major difference. An asset is a benefit that stays with you for a long time, like a building or a car. An expense is a benefit that you use up almost immediately to keep the business running, like a meal for a client or a day of internet access. You can think of an asset as a “long term gift” to the business and an expense as a “short term fuel”.

The reason they both sit on the left when they increase is that they both cost the business something to obtain. If you understand that an expense is just an asset that disappears quickly, the logic of the T account becomes much simpler. You are simply recording the arrival of a benefit. If the benefit lasts years, call it an asset. If it lasts a month, call it an expense. Both make the business “richer” in tools even if the bank account looks “poorer”.

4. See the right side as the source of your business growth

Liabilities, income, and capital all increase on the right side of the T account. To understand why, you must stop thinking about what you “have” and start thinking about “who provided it”. The right side of the accounting equation tells the story of where the value came from. If you have cash in the bank, did it come from a bank loan? That is a liability. Did it come from a sale? That is income. Did it come from your own pocket? That is capital.

When these items increase, we post them on the right side because they are the “sources” of our assets. You can imagine a line flowing from the right side of the book to the left side. The right side provides the power, and the left side shows what that power was turned into. This is why liabilities and capital grow on the credit side. They represent the claims that people have against the business because they provided the resources.

5. Stop focusing only on the movement of physical cash

The biggest hurdle for new learners is “cash myopia”. This is when you only record something if you see physical notes or a bank transfer. In a real business, value moves even when money does not. If a plumber fixes your sink today but says you can pay him next month, you have received a service today. You have an expense that must be debited immediately because you enjoyed the benefit of the repair now.

Because you have not paid yet, you must also record a liability on the right side. You owe that plumber. If you only look at your bank account, you will think your business is doing better than it really is because the money is still there. Accurate accounting means recording the movement of the service on the left and the movement of the “promise to pay” on the right.

6. Treat your business as a separate person from yourself

Small business owners often fail at accounting because they treat the business bank account like a personal wallet. If you take a ream of paper from the office to give to your child for schoolwork, you have reduced the business assets. Even though you own the company, the company is a separate “person” in the eyes of accounting. That paper was a business asset that has now “gone out”.

When you take items for personal use, you must credit the asset account because the item is decreasing. You then debit a special account called “drawings” on the left. This shows that the value has left the business and gone to you. If you do not record this, your books will show you have more stock than you actually do, which leads to confusion when you try to calculate your profits at the end of the year.

7. Learn the simple language of debit and credit

In the world of accounting, the words debit and credit do not mean “good” or “bad”. They simply mean “left” and “right”. In a T account, “debit” is just a label for the left hand column and “credit” is a label for the right hand column. If you can remember that, you are halfway to success. You do not need to overthink the meaning of the words.

For an asset, a debit means the pile is getting bigger. For a liability, a credit means the debt is getting bigger. The reason they are opposites is to keep the whole system in balance. If everything increased on the same side, the scales would tip over. By having some items increase on the left and others on the right, the total of all left sides will always equal the total of all right sides.

8. Recognise that income is the reward for giving something away

Income increases on the right side, which confuses people because they think income is “good” and should be on the “receiving” side. However, think about what happens when you make a sale. You give away a product or a service to a customer. That product goes out of your door. In exchange, money comes in. The “income” account on the right side tracks why the money came in.

The credit to income explains the source of your new wealth. If you see a debit to your cash account, you want to know how that happened. By looking at the credit side of the income account, you can see that the money appeared because you provided value to someone else. It is the “source” of your profit, and sources always live on the right side of the T account system.

9. Use the example of a business vehicle to understand costs

Imagine you own a delivery van. When you pay for fuel, you are buying a service that allows the van to move. This is an expense. You debit the fuel expense account because you are receiving the “power” to drive. You credit the cash account because money is leaving the business. This is a clear business transaction.

Now imagine you use that same van to take your family to a theme park. The fuel used for that trip is not a business expense. If the business pays for that fuel, it is actually a gift to the owner. To fix the books, you must record that the business gave value to the owner. Understanding this distinction helps owners see that every drop of fuel and every hour of a mechanic’s time must be accounted for as either a business benefit or a personal withdrawal.

10. Master the concept of the accounting equation

The reason T accounts work the way they do is based on one master formula. This formula says that your Assets must always equal your Liabilities plus your Capital. It looks like this: Assets = Liabilities + Capital. Because Assets are on the left of the equals sign, they increase on the left. Because Liabilities and Capital are on the right of the equals sign, they increase on the right.

Expenses and Income are just sub-categories of this formula. Expenses eventually reduce your Capital, and Income eventually increases your Capital. This is why Expenses (which reduce the right side) are placed on the left, and Income (which increases the right side) is placed on the right. When you see the T accounts as parts of this one big equation, the logic of the “left” and “right” becomes much clearer.

11. Practise with the internet bill analogy for intangible goods

If you find it hard to understand debiting an expense, think about your home internet. You cannot hold the internet in your hand. It is not like a chair or a computer. However, you pay for it because it provides you with the ability to work and communicate. When you pay the bill, you are “bringing in” the service of connectivity.

In your accounts, you debit the Internet Expense account. This shows the business has received the benefit of being online. You credit the Cash account to show the money has gone out. This is exactly the same logic as buying a physical hammer. One is a tool you can touch, and the other is a tool you can use. Both are benefits that enter the business on the left side of the ledger.

12. Connect the movement of goods to the movement of money

In every transaction, one thing is usually a “form of money” and the other is a “form of value”. If you buy stock for your shop with cash, the “value” (the stock) comes in and the “money” (the cash) goes out. You debit the stock account because assets are increasing. You credit the cash account because assets are decreasing.

If you sell that stock for a profit, the “money” comes in and the “value” goes out. You debit the cash account because your money asset is growing. You credit the sales account to show that the source of this money was the departure of your goods. If you always look for what is arriving and what is leaving, you will never get your debits and credits backwards.

13. Notice how liabilities represent what you owe back

A liability is like a shadow of an asset. If you borrow five thousand dollars from a bank, your cash asset goes up on the left side. But you didn’t “earn” that money, and it isn’t yours forever. You have a responsibility to pay it back. To show this, you create a liability account on the right side.

As long as that money is in your bank, the debt exists on the right side to balance it. When you eventually pay the bank back, your cash decreases (a credit on the right) and your liability decreases (a debit on the left). The T accounts perfectly show the life cycle of a debt, from the moment the money arrives to the moment the obligation is finished.

14. Realise that capital is the business’s debt to the owner

Many people wonder why Capital is on the right side. It helps to think of Capital as the amount the business “owes” back to the person who started it. If you put ten thousand dollars of your own money into a new bakery, the bakery now has ten thousand dollars in cash (a debit). But where did it come from? It came from you.

The Capital account on the right side records your investment. It shows that if the business closed today, it would owe that money back to you. This is why Capital increases on the right side just like a liability. It represents the “source” of the business’s life. By keeping this on the right, the books show that every penny in the business has a clear owner or origin.

15. Use T accounts to spot errors and missing information

The best thing about the T account system is that it acts as a built-in lie detector. If you find that your left side does not equal your right side, you know you have forgotten something. Perhaps you recorded the money leaving the bank but forgot to record what you bought with it. Or perhaps you recorded a new piece of equipment but forgot to record the loan you took to get it.

For a small business owner, this balance is vital. It ensures that every movement of stock, every personal use of the company car, and every bill paid is captured. When the books balance, it means the story of the business is complete. You are seeing the full picture of how value is moving through your company, rather than just watching the balance in your bank app.

Conclusion

Learning how to use T accounts is like learning a new language. At first, it feels strange to put some things on the left and others on the right. However, once you see that the left side is for benefits received (assets and expenses) and the right side is for the sources of those benefits (liabilities, capital, and income), the confusion starts to melt away. Accounting is not just about money; it is about the balance of value. By moving away from “cash only” thinking, you can see how your business really works. Whether you are a student trying to pass an exam or a business owner trying to stay profitable, the double entry system is your best friend. It keeps your records honest and your financial future clear.

See also:

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