Debits and Credits Normal Balances, Permanent & Temporary Accounts

If an account has a Normal Credit Balance, we’d expect that balance to appear in the Credit (right) side of a column. The key to understanding how accounting works is to understand the concept of Normal Balances. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries.

Contra accounts that normally have debit balances include the contra liability, contra equity, and contra revenue accounts. An example of these accounts is the treasury stock (contra equity) account. When a financial transaction occurs, it affects at least two accounts. For example, purchase of machinery for cash is a financial transaction that increases machinery and decreases cash because machinery comes in and cash goes out of the business. The increase in machinery and decrease in cash must be recorded in the machinery account and the cash account respectively.

1. It would be quite unusual for any of these accounts to have a debit balance.
2. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.
3. For example net sales is gross sales minus the sales returns, the sales allowances, and the sales discounts.
4. Then, I’ll give you a couple of ways to remember which is which.
5. Under the accrual basis of accounting, the matching is NOT based on the date that the expenses are paid.

Contra Accounts

The gain is the difference between the proceeds from the sale and the carrying amount shown on the company’s books. To increase an expense account, debit the account. When we’re talking about Normal Balances for Expense accounts, we assign a Normal Balance based on the effect on Equity.

What is the Normal Balance for Revenue Accounts?

A debit balance is a negative cash balance in a checking account with a bank. Alternatively, the bank will increase the account balance to zero via an overdraft arrangement. Overdraft fees can be substantial, so account holders need to be aware of their remaining account balances before issuing checks. These accounts are contained within the liability and equity sections of the balance sheet, and the revenue section of the income statement. It would be quite unusual for any of these accounts to have a debit balance. For reference, the chart below sets out the type, side of the accounting equation (AE), and the normal balance of some typical accounts found within a small business bookkeeping system.

Normal Balance and the Accounting Equation

Revenues and gains are recorded in accounts such as Sales, Service Revenues, Interest Revenues (or Interest Income), and Gain on Sale of Assets. These accounts normally have credit balances that are increased with a credit entry. In a T-account, their balances will be on the right side. Accumulated Depreciation is a contra-asset account (deducted which of the following types of accounts normally have debit balances? from an asset account).

For contra-asset accounts, the rule is simply the opposite of the rule for assets. Therefore, to increase Accumulated Depreciation, you credit it. Here’s a table summarizing the normal balances of the accounting elements, and the actions to increase or decrease them.

He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. Let’s recap which accounts have a Normal Debit Balance and which accounts have a Normal Credit Balance. Then, I’ll give you a couple of ways to remember which is which.