What it means
Double-entry bookkeeping records every transaction twice, as a debit to one account and an equal credit to another, so that the ledger always balances. Each account accumulates its debits on one side and its credits on the other, and its balance at any date is the difference between the two totals: when debits exceed credits the account has a debit balance, and when credits exceed debits a credit balance.
The words carry no sense of good or bad, since they describe which side is larger, and what that means depends on the type of account. Assets and expenses are increased by debits, so they normally carry debit balances: the bank account when the company has money in the bank, receivables for what customers owe, inventory, prepayments, equipment and vehicles for what the company owns, and expense accounts such as wages, rent and materials for the costs incurred so far in the period.
Drawings in a sole trader's books, and dividends declared in a company's, are debit balances too, because they reduce equity. Liabilities, income and equity are increased by credits and normally carry credit balances.
An abnormal debit balance is therefore informative. A supplier's account in the payables ledger with a debit balance means the company has paid the supplier more than it has been invoiced, through a duplicate payment, a payment against an invoice not yet recorded, or a credit note issued for returned goods, while a revenue account with a debit balance means refunds or credit notes have exceeded sales, which may be correct for a small account but is more often a posting error.
An accumulated depreciation account with a debit balance means depreciation has been reversed beyond what was charged, and each case prompts a question, so the review of abnormal balances is a routine control at every period end. The trial balance lists every account with its balance in a debit or a credit column, and the two columns must total the same, which makes it the checkpoint between the ledger and the financial statements.
Accounts with debit balances feed the asset side of the balance sheet and the expense lines of the income statement, while accounts with credit balances feed liabilities, equity and income. For presentation, abnormal balances are usually reclassified, so debit balances in the payables ledger are shown as other receivables rather than netted against payables, and credit balances in the receivables ledger as other payables, so that the balance sheet shows gross amounts owed and owing.
One source of confusion is the bank statement, which is written from the bank's point of view: a customer's deposit is a liability to the bank, so money in the account is a credit balance on the statement, and an overdraft is a debit balance. In the company's own ledger the same money is an asset with a debit balance, and the two records are mirror images that the bank reconciliation proves agree after timing differences.
Managers who read the statement's "CR" as a credit to themselves and the ledger's debit balance as a problem have the picture backwards.
In practice
Real-world examples
Example 1
A company's wages expense account shows a debit balance of $2,400,000 at the year end, representing the wages cost of the year, which is transferred to the income statement.
Example 2
A customer's account in the receivables ledger shows a credit balance of $1,200 after the customer paid an invoice twice; the company refunds the duplicate rather than leaving an abnormal balance on the ledger.
Example 3
A sole trader's drawings account has a debit balance of $48,000 at the year end, the amount the owner has taken from the business, which is deducted from capital in the balance sheet.
Think of it
A debit balance means the debit side is larger-normal for what you own and what you spend.
Formula
Calculation
Account balance = Total debits posted minus Total credits posted
A positive result is a debit balance; a negative result is a credit balance
Trial balance check: Sum of all debit balances = Sum of all credit balances
Worked example: receivables control account. Opening debit balance $420,000. During the year: sales invoices $1,850,000 (debits); cash received from customers $1,790,000 (credits); credit notes issued $35,000 (credits); bad debts written off $8,000 (credits).
- Total debits = $420,000 + $1,850,000 = $2,270,000
- Total credits = $1,790,000 + $35,000 + $8,000 = $1,833,000
- Closing balance = $2,270,000 minus $1,833,000 = $437,000 debit, which is the amount customers owe at the year end
Abnormal balance: a supplier's account in the payables ledger shows invoices of $60,000 (credits) and payments of $65,000 (debits), a debit balance of $5,000. Either the company has overpaid, or a $5,000 invoice has not been recorded; the account is queried with the supplier and, if it is an overpayment, the $5,000 is shown as a receivable, not netted against the other suppliers' balances.
Presentation: at the year end the payables ledger contains debit balances totalling $18,000 and the receivables ledger contains credit balances totalling $22,000. The balance sheet shows trade payables gross of the $18,000, which is reported as other receivables, and trade receivables gross of the $22,000, which is reported as other payables.
Trial balance: the ledger's debit balances (cash $245,000, receivables $437,000, inventory $310,000, equipment $980,000, expenses $1,273,000) total $3,245,000, and the credit balances (payables, loans, share capital, retained earnings, sales) also total $3,245,000, confirming that the double entry is arithmetically complete.Case study
Seen in the real world
This is a fictional, illustrative scenario. A distribution company's ledger showed a debit balance of $312,000 on its bank account at a month end, meaning the books said $312,000 was in the bank. The bank statement for the same date showed a balance of $585,000. The managing director, looking at the statement, concluded that the company had $585,000 of cash, authorised a $500,000 payment to a supplier to secure an early settlement discount, and was surprised the following week when the bank rang about an unarranged overdraft. The bank reconciliation, prepared late that month, explained the gap. Cheques totalling $380,000 had been written and recorded in the ledger but not yet presented by their payees, so the bank had not yet deducted them.
Lodgements of $40,000 recorded in the ledger had not yet been credited by the bank. Bank charges of $2,000 had been deducted by the bank but not yet recorded in the ledger. And a customer's cheque for $65,000 had been paid in, recorded as received, and then dishonoured, which the bank had reversed but the ledger had not. Adjusting the ledger for the two items it had missed gave a corrected debit balance of $312,000 minus $2,000 minus $65,000 = $245,000. Adjusting the statement for the timing differences gave $585,000 minus $380,000 plus $40,000 = $245,000. The two agreed, and the true cash available had been $245,000, not $585,000.
The $500,000 payment had taken the company $255,000 overdrawn. The company changed two things. The bank reconciliation was moved from a month-end task to a daily one, so that the ledger's bank balance could be trusted as the cash position at any time. And the rule was made explicit that cash decisions are taken on the reconciled ledger balance, never on the bank statement balance, because the statement does not know what the company has already committed. The finance manager's note to the managing director explained that the ledger's debit balance was the company's own record of its money, and that it had been right all along.
Watch out
Common mistakes
- Reading "debit" as bad and "credit" as good; the words describe which side of an account is larger, and a debit balance is the normal state of every asset and expense account.
- Netting abnormal balances against normal ones, such as deducting supplier debit balances from total payables, which understates both what is owed and what is receivable.
- Managing cash from the bank statement rather than the reconciled ledger balance, when the statement does not reflect cheques written, lodgements in transit or items the bank has processed that the books have not.
Questions
People also ask
Why does the bank statement show my money as a credit balance?
Because the statement is written from the bank's point of view: your deposit is the bank's liability to you, which is a credit in the bank's books. In your own ledger the same money is an asset with a debit balance.
What does a debit balance on a supplier's account mean?
That payments and credits recorded against the supplier exceed the invoices recorded: an overpayment, a duplicate payment, a missing invoice or an unapplied credit note. It should be investigated and, if it is an overpayment, recovered or shown as a receivable.
How does the trial balance use debit balances?
It lists every account's balance in a debit or credit column; the columns must total the same. Debit balances become assets and expenses in the financial statements, credit balances become liabilities, equity and income.
Watch