The meaning of normal balance in accounting is something one would learn at the very beginning of their bookkeeping and accounting studies. Let’s find out what it is all about and what role it plays in bookkeeping records.
Normal balance is defined as the increase side of a bookkeeping account. Depending on its classification, an account is increased either on the debit or credit side. As you might already know, credit is how much is recorded on the right side of a T-account, while debit is how much is recorded on the opposite side.
As you will see from the illustration above, there are cases when the debit side increases and cases where the credit side increases. In other words, a normal balance can be credit or debit.
Normal balance rules
There is an easy way to remember which accounts should be increased on a debit side and which ones on credit – using the balance sheet equation. How will this help to determine the normal balance of a particular account? If you use the equal sign as the divider, then every account that would be listed on the left of the equal sign will have a debit normal balance, while any account that falls under Liabilities or Owner’s Equity will normally have a credit balance.
Accordingly, Assets will normally have a debit balance and Liabilities – credit. When it comes to the Owner’s Equity, things can get a little confusing because it has a number of components. Just like Liabilities, the Owner’s Equity normally has a credit balance. So, anything that increases the Owner’s Equity will also have a credit normal balance. At the same time, anything that reduces this account will have normal debit balances.
To maintain the balance, the left side (debits) has to equal the right side (credits). So, if you a debit entry, you are going to have to have a credit entry to equal it. There might be transactions that require one debit entry and two credit entries, which must add up to the same amount as that one debit entry.
Using the Normal Balance
What is the significance of the normal balance? Knowing the normal balance of each account is key to being able to records the transactions correctly and maintain the balance in the accounting equation. This information is also valuable when it comes to spotting any inconsistencies. For example, if a Liability account has a debit balance, then it is necessary to check if no errors were made in the bookkeeping records.
At the same time, just because the normal balance of a particular account is debit (or credit), it does not mean the account’s balance will be debit (or credit). Normal balance is just a way of telling which side the transaction would increase and which side it would decrease.