A normal account balance is the side of an account, either debit or credit, on which increases are recorded and on which the account is therefore expected to carry its balance. In double-entry bookkeeping, every account has a normal balance determined by its type. Assets, expenses and owners' drawings normally have debit balances, while liabilities, equity and revenues normally have credit balances.
The rule follows from the accounting equation, assets equal liabilities plus equity. Items on the left side of the equation increase with a debit; items on the right side increase with a credit. Revenues increase equity, so they share equity's credit balance, while expenses and drawings reduce equity, so they carry debit balances. Knowing the normal balance of each account is basic to preparing journal entries and spotting errors.
Normal balances by account type
| Account type | Increase with | Decrease with | Normal balance |
|---|---|---|---|
| Assets | Debit | Credit | Debit |
| Expenses and losses | Debit | Credit | Debit |
| Owner's drawings or dividends | Debit | Credit | Debit |
| Liabilities | Credit | Debit | Credit |
| Owners' equity and retained earnings | Credit | Debit | Credit |
| Revenues and gains | Credit | Debit | Credit |
A common memory aid is "DEALER": dividends, expenses and assets are debit-normal; liabilities, equity and revenue are credit-normal.
Contra accounts
A contra account carries the opposite normal balance to the account it offsets. Examples include:
- Accumulated depreciation, a contra asset with a credit balance that reduces the carrying amount of equipment and buildings.
- Allowance for doubtful accounts, a contra asset with a credit balance that reduces receivables.
- Sales returns and allowances and sales discounts, contra revenue accounts with debit balances.
- Treasury stock, a contra equity account with a debit balance.
- Discount on bonds payable, a contra liability with a debit balance.
Worked example
A consulting firm starts the month with $10,000 in its cash account. During the month it collects $18,000 from clients and pays $12,500 for rent, salaries and supplies. The cash account, an asset, is debited $18,000 and credited $12,500, leaving a debit balance of $15,500, which is normal. Its service revenue account is credited $18,000 for work billed, giving a normal credit balance. Its salaries expense account is debited $9,000, a normal debit balance.
If at month end the cash account showed a credit balance of $2,000, that would be abnormal. It would mean the firm had paid out more than it held, which in practice indicates a bank overdraft that should be reclassified as a liability, or an error such as a deposit posted to the wrong account. Similarly, a debit balance in accounts payable may mean a supplier was paid twice or an invoice was not recorded.
Using normal balances to find errors
When a trial balance is prepared, each account's balance is listed in the debit or credit column. Accountants scan for accounts showing an unexpected side, because abnormal balances are a quick indicator of posting mistakes, reversed entries or transactions that need reclassification. Some balances can legitimately be abnormal, such as a customer account with a credit balance after an overpayment, or retained earnings with a debit balance, known as an accumulated deficit, after years of losses. These should be investigated and, if material, presented appropriately, for instance by showing customer credit balances as liabilities. Accounting software uses the normal balance defined in the chart of accounts to decide how to display each account and to flag unusual results.