Normal balance refers to the expected side or category where an account balance should appear. It is a fundamental concept in accounting that helps ensure accuracy and consistency in financial reporting. Understanding the normal balance of accounts is essential normal balance of accounts for recording transactions and preparing financial statements. Lastly, we discussed the concept of normalizing entries in accounting, which involve adjustments made to financial records to remove abnormal or non-recurring transactions or events.

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. In the case of a contra account, however, the normal balance convention is reversed and a normal balance is reported either as a negative number, or alongside its parent balance as an amount subtracted. By following the expected normal balances, accountants can ensure that the financial statements accurately represent the financial position, performance, and cash flows of the business. Consistency in the presentation and classification of accounts enhances the comparability of financial statements across different periods and entities.

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Conversely, when the company receives a payment from a customer for a previously made credit sale, it records a credit entry in the Accounts Receivable account, decreasing its balance. An abnormal balance can indicate an accounting or payment error; cash on hand should never have a net credit balance, since one cannot credit https://www.bookstime.com/articles/purchase-discounts (pay from) cash what has not been debited (paid in). Similarly, there is little reason for a business to pay a liability in excess of what it owes. 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.

When an amount is accounted for on its normal balance side, it increases that account. On the contrary, when an amount is accounted for on the opposite side of its normal balance, it decreases that amount. Asset, liability, and most owner/stockholder equity accounts are referred to as permanent accounts (or real accounts).

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Every transaction has a corresponding impact on financial statements, and it is crucial to identify the appropriate categories to record these impacts accurately. As noted earlier, expenses are almost always debited, so we debit Wages Expense, increasing its account balance. Since your company did not yet pay its employees, the Cash account is not credited, instead, the credit is recorded in the liability account Wages Payable. Each of the accounts in a trial balance extracted from the bookkeeping ledgers will either show a debit or a credit balance. The normal balance of any account is the balance (debit or credit) which you would expect the account have, and is governed by the accounting equation. This means when a company makes a sale on credit, it records a debit entry in the Accounts Receivable account, increasing its balance.