Unit 2 · Double-Entry System & Ledger Accounts
2-2 The Five Account Types and the Debit/Credit Rules
p.40 gives you a five-row table and one sentence of justification: “these rules are not random; they result from the structure of the accounting equation.” It never shows how. The working takes four lines of ordinary algebra — and when you have seen them, the table stops being something to remember and becomes something you can rebuild.
Guiding question
Why do revenues increase on the credit side and expenses on the debit side? (pp.39–40)
Learning outcome. By the end you can derive the whole debit/credit table from the accounting equation, classify any account into the five types, and explain why classification — not the rule — is where marks are actually lost.
Why accounts have to be classified at all
p.39 states the problem this lesson solves: “whether an increase or decrease occurs depends entirely on the nature and classification of the account.” So before any rule can be applied, the account has to be put in a category. p.40 gives five:
Assets
what it has
Liabilities
what it owes outside
Owner’s Equity
the owner’s claim
Revenue
what it earned
Expenses
what earning cost
Revenue increases owner’s equity, because profit increases the owner’s claim on the business. Expenses decrease owner’s equity, because they reduce profit. The book says both sentences on p.40 and then draws the conclusion: revenue increases on the credit side, expenses on the debit side.
Drawings is the fourth term and it is worth noticing that the book puts it in this formula but leaves it out of the table on the same page. It behaves exactly like an expense as far as the entry is concerned — debited — while being nothing like one in meaning. The next panel shows why both facts are true at once.
The book’s wording, which is what an exam wants: Owner’s Equity = Capital + Revenue − Expenses − Drawings (p.40)
Step 1 of 6 — Start from the equation you already know
Assets equal liabilities plus owner’s equity. This is lesson 1-2, unchanged, and it is the only thing this whole derivation assumes.
The formula and the table are the book’s (p.40). The rearrangement is ours — p.40 says the rules “result from the structure of the accounting equation” and never shows the working, which is what leaves students memorising five rows. Mariam’s figures are the ledger from lesson 1-3, and both column totals are recomputed from it rather than typed in.
A + E + D = L + C + R
everything on the left increases with a debit · everything on the right increases with a credit
Now the book’s table, read straight off
| Account Type | Increase | Decrease | Because it is on the… |
|---|---|---|---|
| Assets | Debit | Credit | left (A) |
| Liabilities | Credit | Debit | right (L) |
| Owner’s Equity | Credit | Debit | right (C) |
| Revenue | Credit | Debit | right (R) |
| Expenses | Debit | Credit | left (E) — it crossed over |
| Drawings | Debit | Credit | left (D) — it crossed over |
The fourth column is not in the book, and it is the only one that matters. Every row is the same fact: an account increases on the side of the equation it sits on. The two rows shaded red are the two that moved when the negatives crossed over — and those are the two rows that get answered wrongly.
Note also that the book’s own table has five rows, not six. Drawings is missing, even though p.40 puts it in the formula directly above. That is why students reach the drawings question with nothing to look up — and why deriving beats recalling.
Where the comparison breaks down: Algebra has no notion of an account "existing". A business really does hold assets and really does consume expenses, and the equation is silent about that difference even though it puts both on the same side.
The table tells you what to do with an asset. It does not tell you whether a receivable is one, whether a bank loan received is revenue, or whether drawings are an expense. Those are the decisions that actually go wrong, and no amount of reciting the table helps with any of them.
So the drill below asks for only the classification. You will not be asked “debit or credit?” once — the side is derived from the type, in front of you, every time.
Name the type. The side follows.
You will not be asked whether something is a debit or a credit — not once. Say what kind of account it is, and the side is read straight off the rearranged equation. That is the claim; this panel is built so you can watch it hold.
Cash
Choose a type. If you are unsure, ask the question that settles it: does the business have it, owe it, earn it, use it up, or did the owner take it?
🧮 The book’s own three-step method, worked on its own case (p.41)
- 1
Analyse. What did the business receive? Inventory. What did it give? Cash. Which accounts? Inventory and Cash.
Why this step: This is lesson 2-1’s method, and the book repeats it here deliberately — analysis comes before classification, and classification before the rule.
- 2
Classify and give the direction. Inventory: asset, increase. Cash: asset, decrease.
Why this step: Both are assets, which is why this case is a good first example — the classification step is easy, so the structure of the method is visible without a hard judgement getting in the way.
- 3
Apply the rule. Assets increase → Debit, so Inventory is debited. Assets decrease → Credit, so Cash is credited.
Why this step: And notice the book writes the rule out in the table as a sentence — “Assets increase → Debit” — rather than just naming the side. It is showing that the entry is a conclusion from the classification, not a separate fact.
- 4
Final entry: Dr Inventory · Cr Cash.
Why this step: Three steps, and the only one requiring thought was the second. That is the shape of every transaction you will ever record.
Most people slip here: The book’s closing instruction on p.41 is worth copying out: apply the rule “logically, not through guessing or memorization, but through understanding the structure of the system.”
Mark each statement ○ if it is true or × if it is false. Decide before you press.
Revenue and expenses are separate from owner’s equity.
Expenses increase on the debit side because they are a kind of asset.
Drawings appear in the owner’s-equity formula on p.40 but not in the table on the same page.
A bank loan received is revenue, because the business receives money.
A + E + D = L + C + R is just a memory aid.
Classifying an account correctly is usually harder than applying the debit/credit rule.
Match each description with the choice that fits it.
Accounts receivable
Accrued rent
Discount allowed
Bank loan
Exam-style — derive the rule for an account type you were never given
The table on p.40 lists five account types and does not include drawings.
Using only the accounting equation and the owner’s-equity formula given on the same page, work out which side increases a drawings account, showing your reasoning. Then explain why drawings is nevertheless not an expense.
One of you names an account; the other gives the type and the side, where the reason for the side must be “it is on the left/right of A + E + D = L + C + R” and not “the table says so”. Then swap. Try to catch each other with discount received, accrued wages, carriage inwards and drawings — the four where the name points one way and the substance the other.
How the real paper is built
The ministry sets half multiple choice and half written answer in every subject. The two halves are not the same skill. In the multiple-choice half you have to spot the wrong options quickly — and the wrong options are built out of the mistakes students really make. In the written half nobody gives you the answer to recognise; you have to produce it, in your own words, with a reason.
Practise both. Being good at one half and weak at the other costs you exactly half the paper.
In a New Context
A bookkeeper posts all six of these to the correct side but the wrong account type: a bank loan received as revenue; drawings as an expense; equipment as purchases; accrued rent as rent expense; a receivable as revenue; discount received as a reduction of purchases.
For each one, state the correct classification. Then answer this: would the trial balance detect any of them, and what does your answer tell you about the relationship between the debit/credit rules and the truthfulness of a set of accounts?
Lesson Question — Answered
Why do revenues increase on the credit side and expenses on the debit side?
Because both are parts of owner’s equity, moving in opposite directions. p.40’s formula says it: OE = Capital + Revenue − Expenses − Drawings. Substitute that into A = L + OE and the whole rule falls out in one line of algebra:
A + E + D = L + C + R
Revenue stayed on the right, with liabilities and capital, so it increases with a credit exactly as they do. Expenses and drawings carried a minus sign, so they crossed the equals sign and landed on the left beside assets — and everything on the left increases with a debit. That is the entire five-row table, and the two rows people get wrong are precisely the two that moved.
Which leaves the part the rule cannot help with. Knowing that expenses are debited is worth nothing until you can tell that a bank loan is not revenue, that accrued rent is not an expense, and that drawings are neither. The rule is one sentence; the classification is the subject.
Sign In to Keep Going
You've reached the end of the free preview. Sign in — and upgrade to Plus or Pro — to keep going with Accounting.
Full Access
Unlock all 11 lessons