Normal balance: Difference between revisions
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Any particular account contains [[debit and credit]] entries. The account's net balance is the difference between the total of the debits and the total of the credits. This can be a net debit balance when the total debits are greater, or a net credit balance when the total credits are greater. By convention, one of these is the normal balance type for each account according to its category. [[Asset]] and [[expense]] accounts have a normal debit balance, while [[liability]], [[equity (finance)|equity]] and [[income]] accounts have a normal credit balance. For [[contra account]]s of each type, the normal balance is reversed. |
Any particular account contains [[debit and credit]] entries. The account's net balance is the difference between the total of the debits and the total of the credits. This can be a net debit balance when the total debits are greater, or a net credit balance when the total credits are greater. By convention, one of these is the normal balance type for each account according to its category. [[Asset]] and [[expense]] accounts have a normal debit balance, while [[liability]], [[equity (finance)|equity]] and [[income]] accounts have a normal credit balance. For [[contra account]]s of each type, the normal balance is reversed. |
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An abnormal balance can indicate an accounting error; [[cash]] on hand should never have a net credit balance, since it cannot be credited (paid from) what has not been debited (paid in). On the other hand, a business that has yet to reach profitability will debit its losses to a cumulative loss equity account, which will appear on statements as negative. This indicates a risk to the business, but not an accounting error. |
An abnormal balance can indicate an accounting error; [[cash]] on hand should never have a net credit balance, since it cannot be credited (paid from) what has not been debited (paid in). On the other hand, a business that has yet to reach profitability will debit its losses to a cumulative earnings/loss equity account, which will appear on statements as negative. This indicates a risk to the business, but not an accounting error. |
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[[Category:Accounting terminology]] |
[[Category:Accounting terminology]] |
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Revision as of 05:26, 22 July 2023
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In accounting, the normal balance for an account is the type of net balance that is shown as a positive number in statements.
Any particular account contains debit and credit entries. The account's net balance is the difference between the total of the debits and the total of the credits. This can be a net debit balance when the total debits are greater, or a net credit balance when the total credits are greater. By convention, one of these is the normal balance type for each account according to its category. Asset and expense accounts have a normal debit balance, while liability, equity and income accounts have a normal credit balance. For contra accounts of each type, the normal balance is reversed.
An abnormal balance can indicate an accounting error; cash on hand should never have a net credit balance, since it cannot be credited (paid from) what has not been debited (paid in). On the other hand, a business that has yet to reach profitability will debit its losses to a cumulative earnings/loss equity account, which will appear on statements as negative. This indicates a risk to the business, but not an accounting error.