Normal Balance of Accounts: Elevate Your Financial Skills with 7 Tips

normal balance

This transaction will require a journal entry that includes an expense account and a cash account. Note, for this example, an automatic off-set entry will be posted to cash and IU users are not able to post directly to any of the cash object codes. Because postage was purchased for $12.70, cash, an asset account, will be credited, which will decrease the cash balance by $12.70. Contrarily, purchasing postage is an expense, and therefore will be debited, which will increase the expense balance by $12.70.

When a payment is made, the credit entry is recorded on the left side and the debit entry is recorded on the right side. And finally, asset accounts will typically have a positive balance, since these represent the company’s valuable resources. This means that when you make a credit entry to one of these accounts, it increases the account balance. While those that typically have a credit balance include liability and equity accounts. The full disclosure principle states that a business must report any business activities that could affect what is reported on the financial statements. These activities could be nonfinancial in nature or be supplemental details not readily available on the main financial statement.

Examples of Normal Balance in Dividends

These accounts, like debits and credits, increase and decrease revenue, expense, asset, liability, and net asset accounts. Expenses normally have debit balances that are increased with a debit entry. Since expenses are usually increasing, think “debit” when expenses are incurred. (We credit expenses only to reduce them, adjust them, or to close the expense accounts.) Examples of expense accounts include Salaries Expense, Wages Expense, Rent Expense, Supplies Expense, and Interest Expense.

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. When it comes to dividends, the normal balance of accounts is typically on the debit side of the ledger.

Permanent and Temporary Accounts

The auditors of a company are required to be employed by a different company so that there is independence. Financial ratios derived from the balance sheet are powerful tools that help in business analysis. Ratios like the leverage ratio, return on assets (ROA), and return on equity (ROE) offer insights into the business’s operational efficiency, financial stability, and investment return. They allow for comparison over time and with industry standards, providing clear indicators of financial health and areas that might require attention or improvement.

normal balance