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 (financial accounting)|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 (financial accounting)|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 or payment error; [[cash]] on hand should never have a net credit balance, since one cannot credit (pay from) cash what has not been debited (paid in). On the other hand, a business that has |
An abnormal balance can indicate an accounting or payment error; [[cash]] on hand should never have a net credit balance, since one cannot credit (pay from) cash what has not been debited (paid in). On the other hand, a business that has not reached profitability will debit a cumulative earnings/loss equity account with its losses, resulting in a negative balance. This indicates a risk to the business, but not an error. |
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[[Category:Accounting terminology]] |
[[Category:Accounting terminology]] |
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Revision as of 17:38, 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 or payment error; cash on hand should never have a net credit balance, since one cannot credit (pay from) cash what has not been debited (paid in). On the other hand, a business that has not reached profitability will debit a cumulative earnings/loss equity account with its losses, resulting in a negative balance. This indicates a risk to the business, but not an error.