Understanding T-Accounts, Debits and Credits
The ADE-LER Framework
A simple way to understand debits and credits is the DC, ADE, LER framework:
- DC — Debits on the left, Credits on the right.
- ADE — Assets, Dividends, and Expenses have a normal debit balance (left side).
- LER — Liabilities, Equity, and Revenue have a normal credit balance (right side).
The Accounting Equation
Assets = Liabilities + Equity
Also known as the Balance Sheet Equation, this principle underpins all financial reporting.
- Assets (OWN) — Represent what a company owns; normal debit balance.
- Liabilities (OWE) — Represent what a company owes; normal credit balance.
Practical Examples
Asset Example — Inventory
| Transaction | Amount | Side |
|---|---|---|
| Opening balance | 200 | Debit |
| Inventory received | +70 | Debit |
| Inventory shipped | -50 | Credit |
| Ending balance | 220 | Debit |
Liability Example — Accounts Payable
| Transaction | Amount | Side |
|---|---|---|
| Opening balance | 300 | Credit |
| New supplier invoices | +70 | Credit |
| Payments made | -120 | Debit |
| Ending balance | 250 | Credit |
Connecting the Two
The company received $70 of inventory but did not pay immediately. The journal entry is:
- Debit Inventory 70 (increasing an asset)
- Credit Accounts Payable 70 (increasing a liability)
Every transaction affects at least two accounts, ensuring total debits always equal total credits.
Revenue vs. Expenses
- Revenue has a normal credit balance — earning revenue increases equity.
- Expenses have a normal debit balance — they reduce equity.
- When profitable: Revenue > Expenses → Profit (increases equity).
- When unprofitable: Revenue < Expenses → Loss (decreases equity).