Question

The normal balance in an asset account is a debit. It's also the normal balance for an expense account. The normal balance for a liability and owner's equity accounts is a credit. Credit is the normal balance for revenues as well. This seems odd. Assets (economic resources) & expenses (outflows incurred to generate revenues) have the same normal balance and so do liabilities (amounts owed or creditor claims)and revenues (increases in equity from business transactions). It seems contradictory. Why is that the way things are done?

Answer 1

Hi

Details as per your question	Your doubt	Explanation
Asset	Debit balance	This seems odd	It seems contradictory that assets and expenses can have debit balances, the explanation is logical when you understands the basics of accounting. Please see below detailed explanation, how the accounting cycle works:
Expense	Debit balance
Liability & Owners equity	Credit balance
Revenue	Credit balance

• Asset, liability and owners' equity accounts are considered as "permanent accounts." These accounts do not get closed at the end of the accounting year. Their balances are carried forward to the next accounting year.
• Revenue and expense accounts are set up as "temporary accounts." The balances in these accounts increase and decrease during the year and get closed out at the conclusion of the accounting year.

• To eliminate the confusion around the meanings of debits and credits, you have to accept the concept that the words have no meaning other than left and right. That's all. It's not any more complicated than that. Debits are used to record increases in assets and expenses.

  Let me illustrate this process with a simple example. Suppose the office manager spends $2000 on advertisement expense through a cheque.

  The entries would be a $2000 debit to the expense account for Advertisement and a credit of $2000 to the company's bank account.

• Accounting equation : Assets = Liabilities + Owners' Equity
• The balance sheet accounts carry assets with debit balances, and liabilities as credit balances. These are static figures and reflect the company's financial position as at the year end
• Revenue and expense transactions are records of inflows & outflows over a period of time. These transactions are accumulated over a time period and are closed out with adjusting accounting entries at the end of the year.
• The resulting profit or loss is posted to the equity capital account to maintain the balance in the accounting equation.
• Consider this example of how the accounting process works. Starting with the accounting equation of assets equal the sum of liabilities plus owners' equity:
• Assets: $3,000,000.
• Liabilities: $2,000,000.
• Owners' equity: $1,000,000.

• During the course of a year, the company has the following revenues and expenses:

Debit	$	Credit	$
Cost if goods sold	2,000,000	Revenues	3,300,000
Administrative Expenses	1,000,000
Taxes	110,000
Net profit	190,000
	3,300,000		3,300,000

• Net profit: $190,000 (this is a profit that will be credited to the owners' equity account).

• For the sake of simplicity, assume that the company made all of its sales for cash. In this case, the company assets would increase over the year by $190,000 in cash collected and the owners' equity account would increase to $1,190,000 ($1,000,000 + $190,000).

  Now, we have the accounting equation:

• Assets: $3,000,000 + $190,000 (cash balance due to nt profit) = $3,190,000.
• Liabilities: $2,000,000.+ Owners' Equity: $1,190,000 = 3,190,000

• The accounting equation balanced and the new accounting year starts again.

2nd Question of yours : This seems contradictory

Please read the above explanation twice and understand each line. You would be clear with the concept how and why it is being done.

Even if you get any doubt please do not hesitate to raise it through comment section.

I would be happy to help :-)

Good luck