What is a normal balance?
One of the basic accounting terms is a normal balance. It’s used to describe a balance that an account should have. The balance itself can be debit or credit, whereas an account can be active or passive. The thing is that a particular type of account should always have a particular balance type. Only in this case, the account balance can be called normal.
Account types in details
Even though it may happen that an account has a certain balance type, whereas it should have another one, it’s usually a rare thing. In order to see what balance each account type should have, we present you with the table below.
All the contra accounts stated in the above-mentioned table have a normal balance that is the opposite of the account it is associated with. It happens because they act as balancing accounts.Here is the list of problems that make an account to have a balance that is absolutely opposite to what it should have (normal balance):
- There might have been a mistake when making a journal entry. It could also be recorded in the wrong account.
- If an offsetting entry was made too early, and it should have been offset by another entry.
How normal balance helps
Ideally, all the above-mentioned account types should have a normal balance as stated. Nonetheless, it may happen that a debit account has a credit balance as well. It varies from the bookkeeping entries and all possible errors that occur from time to time.That is why the main advantage of knowing the normal balance is that particular measures can be taken when necessary. As a rule, one of the major indicators that something goes wrong is the fact that an account has an abnormal balance, which is the opposite of the normal one. In this case, there might be an error or other issue that requires an urgent investigation.Keep in mind that if an account is usually a debit one, any debit entry increases the balance. The same works vice versa. If an account is usually credit, any credit entry increases the balance. Therefore, it’s so important to make only the right entries, as they influence the balance directly. If they’re filled out incorrectly, the company will eventually suffer inevitable losses. Make sure to check what the normal balance should be for each particular account type as often as possible.
How not to mix debits and credits
As you now know, each account type should be debit or credit. However, it’s important not to mix them. You’re not likely to remember the above-mentioned table right away. What can you do in this case then? The answer is that you should at least remember those accounts that are debit (or credit).Once you do this, you’ll automatically remember that the rest of the accounts are of another type. It’s also important to keep in mind what exactly increases or decreases a certain account type. It will allow you to have a clearer picture in your head when it comes to choosing what does what.Here, you see a great example of what increases and decreases a certain account balance.
What categories are included in different account types?
It’s also important to know what categories are hidden under all these account types. This is a good thing to remember, as it clarifies the concept of debits and credits. After that, you’ll understand why this account type is debit and another one is credit. Let’s take a closer look at asset accounts first. They consist of the following substructures:
- Cash
- Accounts Receivable
- Inventory
- Equipment.
We’ve analyzed the accounts that are usually considered debit. Now, let’s see what details have credit ones. The first example is expense accounts that include the following:
- Rent
- Salaries
- Utilities
- Insurance.
For instance, revenue accounts look like:
- Sales
- Doctor Fees
- Interest Income.
If we take liability accounts, here you can see the following examples:
- Accounts Payable
- Accrued Expenses
- Bank Loan
- Deferred Revenue.
To sum it up
Knowing what a normal balance gives you the basics of double-entry bookkeeping. It’s not that difficult to figure out to what account type each transaction belongs to. If you memorize our table mentioned above, you’ll already make a huge progress. However, the best way to keep the information in your mind is to work with it. Eventually, you’ll get used to the way it works.
