To keep accounting records correctly, you need to understand the terminology. What is a normal balance? How to understand which account has a credit and which one has a normal debit balance? Read this article to find the answers.
Normal Balance and the Accounting Equation
Accountants usually use the double-entry method to keep the records. The double-entry way means that for every transaction, there should be at least two journal entries made. Depending on the type of account, the debit or credit entry may reflect an increase or decrease in one or another account.
An accounting equation, where Assets = Liabilities + Owner’s Equity, determines whether the account increases with a debit or a credit entry. Accounts on the left side of the accounting equation will increase with a debit entry and will have a debit (DR) normal balance. Accounts on the right side of the accounting equation will have a normal credit balance.
Here is a list of the normal balance of standard accounting accounts:
- Asset: Debit
- Expense: Debit
- Dividends: Debit
- Liability: Credit
- Owner’s Equity: Credit
- Revenue: Credit
- Retained Earnings: Credit
Normal Balance Examples
Let’s try to explain normal balance using an example. Let’s say you have one accounting book of records, and you pay $450 to the supplier for the goods. You have to record this amount two times. Thus, you will need to make an entry under the Cash account to decrease it, and the Supplies account to show an increase in the supplies. Both accounts belong to Assets, so they have a normal debit balance and will increase with a debit entry and decrease with a credit entry.
Let’s look at another example. Let’s assume that you deposited $10,000 into your business account. The two accounts that this transaction affects are Bank because money is being received and Capital because cash put into the business by the owner, goes into the Capital account. The capital account is an Owner’s Equity account, so it has a normal credit balance, and the Bank is an Asset account, so it has a normal debit balance.
Contra accounts are individual accounts that are established to decrease the balance in another account indirectly. They are “backwards” accounts – their normal balances are the opposite of normal balances of the account(s) a bookkeeper associated them to.
Examples: Primary Account – Contra Account
- Accounts Receivable – Allowance for Doubtful Accounts
- Fixed Assets – Accumulated Depreciation
- Intangible Assets – Accumulated Amortization
- Sales Revenue – Sales Returns and Allowance / Sales Discounts
- Loans Receivable – Allowance for Doubtful Loans
For example, a contra asset account is an Accumulated Depreciation. So, if a company has an asset such as Truck with a debit balance of $35,000 and the account Accumulated Depreciation has a credit balance of $6,000, the carrying amount (or book value) of the truck is $29,000.
Using the Normal Balance
The accounting double-entry method, which helps to have a timely and reliable reflection of all transactions, would not exist without the normal balances. We should note that an account that has a normal credit balance can have a debit balance and vice versa.
This can happen due to a simple mistake when one recorded entries, so knowing what the normal balance for the account is can help to catch that mistake.
Also, an entry can reverse a transaction that was in a prior year and was already zeroed out of the account, or a bookkeeper made an offsetting entry before the entry it was intended to offset, leading to an opposite balance.
Normal Balances of Accounts Chart
As you learned above, an account has either credit or debit normal balance. When looking at the expanded accounting equation: Assets + Expenses + Dividends + Losses = Liabilities + Capital + Revenue + Gains, it is much easier to determine which account has a credit or debit account. In the table below, you can check the normal balances of different types of accounts and how debit and credit entries affect them.