Normal balance refers to the expected balance for each type of account, either a debit or credit balance. The balance is determined by how much the account increases. Transactions have either a debit or credit value, and a business generally prefers debits. A general ledger has columns for debit, credit, and balance, and a T account is a tool used to analyze transactions.
In accounting terminology, a normal balance refers to the type of balance that is considered normal or expected for each type of account. It can be a debit balance or credit balance. For asset and expense accounts, the normal balance is a debit balance. For liability, equity, and income accounts, the normal balance is a credit balance.
Whether the normal balance is a credit or debit balance is determined by how much the balance of that particular account increases. As such, in a cash account, any debits will increase the balance of the cash account, therefore your normal balance is a debit. The same is true for all expense accounts, such as the utility expense account. In contrast, a credit, not a debit, is what increases an income account, so for this type of account, the normal balance is a credit balance.
This is all basic and common sense to accountants, bookkeepers, and others experienced in studying balance sheets, but it can leave a layman scratching their heads. To better understand normal balances, you must first be familiar with accounting terms such as debits, credits, and the different types of accounts. Basically, once basic accounting terminology is learned and understood, the normal balance for each specific industry will become second nature.
Every business transaction, such as a sale, purchase, or payment, has an associated debit or credit value. In general, it has a debit value if it implies a decrease in liabilities or an increase in assets. Meanwhile, a transaction has credit value if it means an increase in liabilities or a decrease in assets. A transaction must correspond to only one debit or credit, never to both at the same time. Generally speaking, debits are more desirable in a business than credits.
In a general ledger, or any other accounting journal, you always see columns marked “debit” and “credit.” The debit column is always to the left of the credit column. Next to the debit and credit columns there is usually a “balance” column. In this column, the difference between the debit and the credit is recorded. If the debit is greater than the credit, the resulting difference is a debit, and this is displayed as a numeric figure. If the credit is greater than the debit, the difference is a credit, and this is recorded as a negative number or, in accounting style, a number in parentheses, such as (500). Therefore, if the entry in the balance column is 1,200, this reflects a debit balance. If it appears as (5000), then this is a credit balance. As mentioned, normal balances can be credit or debit balances, depending on the type of account.
A T account is a basic, special tool that accountants also use to analyze transactions. It has the usual debit and credit columns, on the left and right sides, respectively. But it doesn’t have a balance column, or even a date column that is normally found in other accounting records. You can tell if you have a credit balance or a debit balance by where the balance is written: in the left column for a debit balance, and in the right column for a credit balance.
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