Normal Balance of Accounts

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:

Assets = Liabilities + Equity
This can be developed into the expanded accounting equation as follows.
Assets + Expenses + Dividends = Liabilities + Capital + Revenue

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.

Accounting Equation and Normal Balances
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.

By identifying the type of account (asset, liability etc.) and establishing which side of the accounting equation it is on (left or right), it is possible to determine whether the account would normally have a debit or a credit balance.
To understand the concept of the normal balance consider the following examples in relation to the table above.
  1. Accounts payable normal balance: Accounts payable is a liability on the right side of the accounting equation and is normally a credit balance.
  2. Accounts receivable normal balance: Accounts receivable is an asset on the left side of the accounting equation and is normally a debit balance.
  3. Cash normal balance: Cash is an asset on the left side of the accounting equation and is normally a debit balance.
  4. Common stock normal balance: Common stock is part of capital on the right side of the accounting equation and is normally a credit balance.
  5. 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.
  6. Dividends normal balance: A dividend is on the left side of the accounting equation and is normally a debit balance.
  7. Inventory normal balance: Inventory is an asset on the left side of the accounting equation and is normally a debit balance.
  8. 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.

  1. 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
  2. Contra revenue normal balance: Revenue is normally a credit balance so a contra revenue account such as sales returns is normally a debit balance
  3. 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.

Normal Balances of Accounts Chart
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
Normal Balance of Accounts June 5th, 2018Team

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