The Normal Balance of an account is either a debit (left side) or a credit (right side). It’s the column we would expect to see the account balance show up. The same rules apply to all asset, liability, and capital accounts. In accounting, an account is a specific asset, liability, or equity unit in the ledger that is used to store similar transactions. 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. This account is a non-operating or “other” expense for the cost of borrowed money or other credit.
An account with a balance that is the opposite of the normal balance. For example, Accumulated Depreciation is a contra asset account, because its credit balance is contra to the debit balance for an asset account. This is an owner’s equity account and as such you would expect a credit balance.
This is important for accurate financial reporting and compliance with… Asset, liability, and most owner/stockholder equity accounts are referred to as permanent accounts (or which of the following types of accounts normally have debit balances? real accounts). Permanent accounts are not closed at the end of the accounting year; their balances are automatically carried forward to the next accounting year. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.
Normal Balances
Expenses normally have debit balances that are increased with a debit entry. Since expenses are usually increasing, think “debit” when expenses are incurred. In a T-account, their balances will be on the left side. Temporary accounts (or nominal accounts) include all of the revenue accounts, expense accounts, the owner’s drawing account, and the income summary account. Generally speaking, the balances in temporary accounts increase throughout the accounting year. At the end of the accounting year the balances will be transferred to the owner’s capital account or to a corporation’s retained earnings account.
( . Expense accounts:
- Interest Revenues are nonoperating revenues or income for companies not in the business of lending money.
- Because of the impact on Equity (it decreases), we assign a Normal Debit Balance.
- Accounts Receivable is an asset account and is increased with a debit; Service Revenues is increased with a credit.
- When you place an amount on the normal balance side, you are increasing the account.
- The Normal Balance of an account is either a debit (left side) or a credit (right side).
Based on the rules of debit and credit (debit means left, credit means right), we can determine that Assets (on the left of the equation, the debit side) have a Normal Debit Balance. That normal balance is what determines whether to debit or credit an account in an accounting transaction. 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. For this reason the account balance for items on the left hand side of the equation is normally a debit and the account balance for items on the right side of the equation is normally a credit. Salaries Expense will usually be an operating expense (as opposed to a nonoperating expense).
What is a Normal Balance in Accounting?
When you place an amount on the normal balance side, you are increasing the account. If you put an amount on the opposite side, you are decreasing that account. To increase liability and capital accounts, credit. 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. Whenever cash is received, the asset account Cash is debited and another account will need to be credited.
We want to specifically keep track of Dividends in a separate account so we assign it a Normal Debit Balance. Liabilities (on the right of the equation, the credit side) have a Normal Credit Balance. We will apply these rules and practice some more when we get to the actual recording process in later lessons. The terms originated from the Latin terms “debere” or “debitum” which means “what is due”, and “credere” or “creditum” which means “something entrusted or loaned”.
The rules of debit and credit are the heart of accounting and their understanding is extremely important for individuals responsible for handling the accounting system of a business entity. 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. The understanding of normal balances of accounts helps understand the rules of debit and credit easily. If the normal balance of an account is debit, we shall record any increase in that account on the debit side and any decrease on the credit side.