Why Do Assets and Expenses Both Have a Debit Balance?

What is a credit balance

Closing your books each year helps you to see when you are doing well.

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Before you can understand why assets and expenses both have a debit balance, you must understand what accounts are and how they fit together in accounting. The accounting equation, assets equals liabilities plus equity, is the base of the double-entry bookkeeping system. Assets and expenses both have debit balances because of each of their positions in the accounting equation. Assets are a permanent account and expenses are a temporary sub-account of equity.

The balance sheet accounts, assets, liabilities and equity, are the main account classifications in accounting. Assets are what you own, liabilities are what you owe and equity is what is due to or from the owner of the company and stockholders. The income statement accounts, expenses and revenues, are sub-accounts of equity. The equity account also includes the sub-account draws, which is money withdrawn from the company for the owner or stockholders. Expenses, revenues and draws are temporary or nominal accounts that close into the equity account at the end of an accounting period or fiscal year.

The first reason expenses and assets both have a debit balance is because of normal balances. Debits are always in the left column; credits are always in the right column. This does not mean debits and credits have the same affect in different types of accounts. Each account has a normal balance that is either a debit or credit. The normal balance is the side that increases the account. The normal balance for assets is debit, liabilities is credit and equity is credit. The normal balance for expenses is debit, revenues is credit and draws is debit.

The next reason assets and expenses both have debit balances is because they are in different positions in the accounting equation. The assets are permanent accounts that you include in the accounting equation. Expenses are a temporary or nominal sub-account of equity that you close into the equity account. This means you include expenses in the accounting equation as a part of equity but they are not subtracted directly from assets.

Closing accounts shows you where assets are in relation to expenses in the accounting equation. At the end of the year, close the revenues and expenses accounts into the income summary. Debit revenues to zero it out because it has a credit normal balance and credit income summary. Credit expenses to zero it out because it has a debit normal balance and debit income summary. The income statement is also called the profit and loss report. If your company made a profit, the income statement has a debit balance; if it has a credit balance, your company lost money. At this point, the results of your expenses account are in the income statement and the expenses account has a zero balance. Close the income statement into retained earnings and close the draws account to retained earnings. In the final closing step, combine retained earnings with equity. Expenses are debits because revenues are credits. For the income statement to properly reflect the company's profits or losses for a set period, expenses must be a debit. In other words: Assets equals liabilities plus equity(plus revenues minus expenses minus draws). Combine with equity equals revenues minus expenses minus draws.


What is the difference between current balance, available credit and credit card limit?

Your current balance is the amount currently owing on your card account.

The available credit is the amount that you have available to spend. This is based on the credit limit less the current balance less any pending transactions.

The credit limit is the amount of credit available on your card account. You can spend up to this limit.

If your account has a credit current balance or the pending transaction is a payment, the available credit will be your credit limit plus the credit current balance plus the credit pending transaction.