What is a Normal Balance?
The normal balance of an account is the side, debit or credit, on which increases to that account are recorded. Assets, expenses, and dividends normally carry debit balances, while liabilities, equity, and revenues normally carry credit balances. Knowing an account's normal balance is the first step to reading any journal entry or trial balance correctly.
An account's normal balance is the side (debit or credit) that increases it: debit for assets, expenses, and draws; credit for liabilities, equity, and revenue.
- •Assets (Cash, Inventory, Equipment)
- •Expenses (Rent, Salaries, Utilities)
- •Dividends / Owner's Draws
- •Liabilities (Accounts Payable, Loans)
- •Equity (Common Stock, Retained Earnings)
- •Revenue (Sales, Service Income)
Step-by-step worked examples
A company buys $5,000 of equipment for cash. Which accounts change, and on which side?
Equipment is an asset -> normal debit balance -> debit Equipment $5,000 Cash is an asset -> normal debit balance, but it decreases -> credit Cash $5,000 Both sides are recorded on their normal-balance side of increase/decrease
A business receives $2,000 cash for services performed. How is this recorded?
Cash is an asset (debit-normal) and it increases -> debit Cash $2,000 Service Revenue is revenue (credit-normal) and it increases -> credit Service Revenue $2,000
A company pays off $1,200 of Accounts Payable in cash. Which side moves?
Accounts Payable is a liability (credit-normal) and it decreases -> debit Accounts Payable $1,200 Cash is an asset (debit-normal) and it decreases -> credit Cash $1,200
Flashcards
Quick quiz
Q1.What is the normal balance of the Cash account?
Q2.What is the normal balance of Accounts Payable?
Q3.Which account type shares the same normal balance as Expenses?
Q4.A credit entry to Retained Earnings does what?
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Common mistakes
Debit always means 'increase' and credit always means 'decrease.' — Correct: It depends on account type — debit increases assets/expenses but decreases liabilities/equity/revenue.
Revenue has a debit-normal balance like an expense. — Correct: Revenue is credit-normal because it increases equity; only expenses are debit-normal.
A liability with a debit balance is normal. — Correct: A debit balance in a liability account is unusual and usually signals an overpayment or error.
Dividends/draws are credit-normal because they reduce equity. — Correct: Dividends/draws are debit-normal — they reduce equity but behave like an expense account.
FAQ
What is a normal balance in accounting?
It's the side, debit or credit, on which an account is expected to have a balance, based on its increase side.
What is the normal balance formula?
There's no math formula — it's a classification rule: Assets/Expenses/Dividends = debit-normal; Liabilities/Equity/Revenue = credit-normal.
What are examples of normal balances?
Cash (asset) is debit-normal; Accounts Payable (liability) is credit-normal; Sales Revenue is credit-normal.
How do you know if an account normally increases with a debit or credit?
Identify its category using the accounting equation Assets = Liabilities + Equity: assets/expenses/dividends sit on the debit side, liabilities/equity/revenue on the credit side.