Normal Balance for an Account
The “normal balance” for an account in accounting refers to whether that account typically carries a debit or credit balance. In other words, it’s the side (debit or credit) that increases the balance of the account. It is determined by the nature of an account in the chart of accounts under the double-entry bookkeeping system.
Here is the normal balance for each type of account:
- Assets: Normal balance is a Debit. Assets increase with a debit entry and decrease with a credit entry.
- Liabilities: Normal balance is a Credit. Liabilities increase with a credit entry and decrease with a debit entry.
- Equity: Normal balance is a Credit. Equity accounts increase with a credit entry (owner’s capital, retained earnings) and decrease with a debit entry.
- Revenue or Income: Normal balance is a Credit. Revenue accounts increase with a credit entry and decrease with a debit entry.
- Expenses and Losses: Normal balance is a Debit. Expense accounts increase with a debit entry and decrease with a credit entry.
- Dividends or Drawings: Normal balance is a Debit. These accounts increase with a debit entry and decrease with a credit entry.
So, if you’re debiting an asset or expense account, you’re increasing its balance. If you’re crediting a liability, equity, or revenue account, you’re also increasing its balance. Conversely, crediting an asset or expense account, or debiting a liability, equity, or revenue account, decreases its balance.
Example of the Normal Balance for an Account
Let’s consider some examples for a fictional company “ABC Corp.” to illustrate how the normal balance works:
- Asset Account (Cash): Let’s say ABC Corp. begins its operation with an investment of $50,000. The company’s Cash account (an Asset account) will be debited by $50,000, increasing its balance because the normal balance for Asset accounts is a debit.
- Liability Account (Accounts Payable): Now, ABC Corp. purchases $20,000 worth of inventory on credit. The Accounts Payable account (a Liability account) will be credited by $20,000, increasing its balance because the normal balance for Liability accounts is a credit.
- Equity Account (Common Stock): If ABC Corp. issues $30,000 worth of common stock to investors, the Common Stock account (an Equity account) will be credited by $30,000, increasing its balance because the normal balance for Equity accounts is a credit.
- Revenue Account (Sales Revenue): If ABC Corp. makes sales worth $40,000, the Sales Revenue account will be credited by $40,000, increasing its balance because the normal balance for Revenue accounts is a credit.
- Expense Account (Rent Expense): If ABC Corp. pays $5,000 as monthly rent, the Rent Expense account will be debited by $5,000, increasing its balance because the normal balance for Expense accounts is a debit.
- Dividends Account: If ABC Corp. declares ,000 in dividends, the Dividends account will be debited by $1,000, increasing its balance because the normal balance for Dividends accounts is a debit.
These examples illustrate how each type of account is affected by debit and credit transactions based on their normal balances. The normal balance is the side that increases the account. Conversely, if you record a transaction on the opposite side, it decreases the balance of the account.
