Each of the accounts in a trial balance extracted from the bookkeeping ledgers will either show a debit or a credit balance. The normal balance of any account is the balance (debit or credit) which you would expect the account have, and is governed by the accounting equation.
Normal Balance and the Accounting Equation
The basic accounting equation can be stated as follows:
Debit simply means on the left side of the equation, whereas credit means on the right hand side of the equation as summarized in the table below.
| Left | Right | |
|---|---|---|
| Basic | Assets | Liabilities + Equity |
| Expanded | Assets + Expenses + Dividends | Liabilities + Capital + Revenue |
| Normal | Debit | Credit |
For this reason the normal balance for items on the left hand side of the equation is a debit and the normal balance for items on the right side of the equation is a credit.
Normal Balance Examples
From the table above it can be seen that assets, expenses, and dividends normally have a debit balance, whereas liabilities, capital, and revenue normally have a credit balance.
- Accounts payable normal balance: Accounts payable is a liability on the right side of the accounting equation and is normally a credit balance.
- Accounts receivable normal balance: Accounts receivable is an asset on the left side of the accounting equation and is normally a debit balance.
- Cash normal balance: Cash is an asset on the left side of the accounting equation and is normally a debit balance.
- Common stock normal balance: Common stock is part of capital on the right side of the accounting equation and is normally a credit balance.
- Cost of goods sold normal balance: Cost of goods sold is an expense on the left side of the accounting equation and is normally a debit balance.
- Dividends normal balance: A dividend is on the left side of the accounting equation and is normally a debit balance.
- Inventory normal balance: Inventory is an asset on the left side of the accounting equation and is normally a debit balance.
- Retained earnings normal balance: Retained earnings is part of the equity of the business on the right side of of the accounting equation and is normally a credit balance.
Contra Accounts
A contra account is one which is offset against another account. So for example there are contra expense accounts such as purchase returns, contra revenue accounts such as sales returns and contra asset accounts such as accumulated depreciation.
Since the purpose of the contra account is to be offset against the balance on another account, it follows that the normal balance on the contra account will be the opposite of the original account.
- Contra expense normal balance: An expense is normally a debit balance so a contra expense account such as purchase returns is normally a credit balance
- Contra revenue normal balance: Revenue is normally a credit balance so a contra revenue account such as sales returns is normally a debit balance
- Contra asset normal balance: An asset is normally a debit balance so a contra asset account such as accumulated depreciation is normally a credit balance
Using the Normal Balance
Although each account has a normal balance in practice it is possible for any account to have either a debit or a credit balance depending on the bookkeeping entries made.
The benefit of knowing the normal balance is that if an account shows a balance other than its normal balance, for example an inventory account with a credit balance, it is a good indication that there might be an error on the account and further investigation may be needed.
It should be noted that if an account is normally a debit balance it is increased by a debit entry, and if an account is normally a credit balance it is increased by a credit entry. So for example a debit entry to an asset account will increase the asset balance, and a credit entry to a liability account will increase the liability.
Normal Balances of Accounts Chart
For reference, the chart below sets out the type, side of the accounting equation (AE), and the normal balance of some typical accounts found within a small business bookkeeping system.
| Account | Type | AE | Normal |
|---|---|---|---|
| Bank checking account | Asset | Left | Debit |
| Bank savings account | Asset | Left | Debit |
| Online savings account | Asset | Left | Debit |
| Petty cash account | Asset | Left | Debit |
| Paypal account | Asset | Left | Debit |
| Accounts receivable | Asset | Left | Debit |
| Allowance for doubtful debts | Contra asset | Left | Credit |
| Inventory | Asset | Left | Debit |
| Prepayments | Asset | Left | Debit |
| Property | Asset | Left | Debit |
| Property Depreciation | Contra asset | Left | Credit |
| Plant | Asset | Left | Debit |
| Plant depreciation | Contra asset | Left | Credit |
| Equipment | Asset | Left | Debit |
| Equipment depreciation | Contra asset | Left | Credit |
| Accounts payable | Liability | Right | Credit |
| Payroll payable | Liability | Right | Credit |
| Interest payable | Liability | Right | Credit |
| Accrued expenses | Liability | Right | Credit |
| Unearned revenue | Liability | Right | Credit |
| Sales Tax payable | Liability | Right | Credit |
| Purchase Tax payable | Liability | Right | Credit |
| Payroll tax payable | Liability | Right | Credit |
| Income tax payable | Liability | Right | Credit |
| Mortgage loan | Liability | Right | Credit |
| Other loans | Liability | Right | Credit |
| Capital | Capital | Right | Credit |
| Dividends | Dividend | Right | Debit |
| Retained earnings | Equity | Right | Credit |
| Retail sales | Revenue | Right | Credit |
| Services | Revenue | Right | Credit |
| Discounts allowed | Contra Revenue | Right | Debit |
| Materials purchased | Expense | Left | Debit |
| Packaging | Expense | Left | Debit |
| Discounts received | Contra expense | Left | Credit |
| Shipping costs | Expense | Left | Debit |
| Import duty | Expense | Left | Debit |
| Productive Labour | Expense | Left | Debit |
| Research and development | Expense | Left | Debit |
| Sales commissions | Expense | Left | Debit |
| Sales promotion | Expense | Left | Debit |
| Advertising | Expense | Left | Debit |
| Gifts and samples | Expense | Left | Debit |
| Marketing expenses | Expense | Left | Debit |
| Payroll | Expense | Left | Debit |
| Contract labor | Expense | Left | Debit |
| Payroll expenses | Expense | Left | Debit |
| Payroll benefits | Expense | Left | Debit |
| Payroll taxes | Expense | Left | Debit |
| Computer and internet | Expense | Left | Debit |
| Software | Expense | Left | Debit |
| Website | Expense | Left | Debit |
| Rent | Expense | Left | Debit |
| Property taxes | Expense | Left | Debit |
| Utilities | Expense | Left | Debit |
| Motor expenses | Expense | Left | Debit |
| Travelling | Expense | Left | Debit |
| Hotels | Expense | Left | Debit |
| Meals and entertainment | Expense | Left | Debit |
| Printing | Expense | Left | Debit |
| Postage and carriage | Expense | Left | Debit |
| Telephone | Expense | Left | Debit |
| Office supplies | Expense | Left | Debit |
| Professional fees | Expense | Left | Debit |
| Equipment hire | Expense | Left | Debit |
| Repairs and maintenance | Expense | Left | Debit |
| Supplies and cleaning | Expense | Left | Debit |
| Bad debt expense | Expense | Left | Debit |
| Dues and membership fees | Expense | Left | Debit |
| Research and development | Expense | Left | Debit |
| Insurance | Expense | Left | Debit |
| Security | Expense | Left | Debit |
| Suspense account | Expense | Left | Debit |
| Depreciation | Expense | Left | Debit |
| Interest expense | Expense | Left | Debit |
| Bank fees | Expense | Left | Debit |
| Interest income | Revenue | Right | Credit |
| Rent income | Revenue | Right | Credit |
| Income tax expense | Expense | Left | Debit |