For example, if an asset account which is expected to have a debit balance, shows a credit balance, then this is considered to be an abnormal balance. 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. Under the accrual basis of accounting, the Interest Revenues account reports the interest earned by a company during the time period indicated in the heading of the income statement.

What are the Normal Balances of each type of account?

If the payment was made on June 1 for a future month (for example, July) the debit would go to the asset account Prepaid Rent. Understanding the nature of each account type and its normal balance is key to knowing whether to debit or credit the account in a transaction. In accounting, debits and credits are the fundamental building blocks in a double-entry accounting system.

Using the Normal Balance

Accounts that normally have a debit balance include assets, expenses, and losses. Examples of these accounts are the cash, accounts receivable, prepaid expenses, fixed assets (asset) account, wages (expense) and loss on sale of assets (loss) account. Contra accounts that normally have debit balances include the contra liability, contra equity, and contra revenue accounts. An example of these accounts is what is form 1095 the treasury stock (contra equity) account. 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.

Understanding the normal balance of accounts

Remember, the normal balance is the side (debit or credit) that increases the account. For asset accounts, such as Cash and Equipment, debits increase the account and credits decrease the account. The double-entry system requires that the general ledger account balances have the total of the debit balances equal to the total of the credit balances.

1. A current asset account that reports the amount of future rent expense that was paid in advance of the rental period.
2. For example, if a company borrows $10,000 from its local bank, the company will debit its asset account Cash for $10,000 since the company’s cash balance is increasing.
3. Because of the impact on Equity (it decreases), we assign a Normal Debit Balance.

An allowance granted to a customer who had purchased merchandise with a pricing error or other problem not involving the return of goods. If the customer purchased on credit, a sales allowance will involve a debit to Sales Allowances and a credit to Accounts Receivable. This way, the transactions are organized by the date on which they occurred, providing a clear timeline of the company’s financial activities. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own.

There are several meanings for the term debit balance that relate to accounting, bank accounts, lending, and investing. This is a non-operating or “other” item resulting from the sale of an asset (other than inventory) for more than the amount shown in the company’s accounting records. The gain is the difference between the proceeds from the sale and the carrying amount shown on the company’s books. A debit balance is the remaining principal amount of debt owed to a lender by the borrower.

Every transaction that happens in a business has an impact on the owner’s Equity, their value in the business. Equity (what a company owes to its owner(s)) is on the right side of the Accounting Equation. Liabilities (what a company owes to third parties like vendors or banks) are on the right side of the Accounting Equation. Assets (what a company owns) are on the left side of the Accounting Equation. If an account has a Normal Debit Balance, we’d expect that balance to appear in the Debit (left) side of a column.

Interest Revenues account includes interest earned whether or not the interest was received or billed. Interest Revenues are nonoperating revenues or income for companies not in the business of lending money. For companies in the business of lending money, Interest Revenues are reported in the operating section of the multiple-step income statement. Under the accrual basis of accounting, the Service Revenues account reports the fees earned by a company during the time period indicated in the heading of the income statement. Service Revenues include work completed whether or not it was billed.

Examples of Debit Balances

This is an owner’s equity account and as such you would expect a credit balance. Other examples include (1) the allowance for doubtful accounts, (2) discount on bonds payable, (3) sales returns and allowances, and (4) sales discounts. The contra accounts cause a reduction in the amounts reported. For example net sales is gross sales minus the sales returns, the sales allowances, and the sales discounts. The net realizable value of the accounts receivable is the accounts receivable minus the allowance for doubtful accounts.

It aids in maintaining accurate financial records and statements that mirror the true financial position of your business. Misunderstanding normal balances could lead what is a normal balance with picture to errors in your accounting records, which could misrepresent your business’s financial health and misinform decision-making. When an account has a balance that is opposite the expected normal balance of that account, the account is said to have an abnormal balance.

Accruing tax liabilities in accounting involves recognizing and recording taxes that a company owes but has not yet paid. This is important for accurate financial reporting and compliance with… The rest of the accounts to the right of the Beginning Equity amount, are either going to increase or decrease owner’s equity.

As a contra revenue account, sales discount will have a debit balance and is subtracted from sales (along with sales returns and allowances) to arrive at net sales. Revenue is the income that a company earns from its business activities, typically from the sale of goods and services to customers. 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 having many revenue accounts and a huge number of expense accounts, a company will be able to report detailed information on revenues and expenses throughout the year. Knowing the normal balances of accounts is pivotal for recording transactions correctly.