Normal account balance

Normal account balance
See also
Normal account balance
See also

The rules of debit and credit (RDC) based on double-entry bookkeeping (DEB) have history longer than 500 years. It is well known and commonly applied method of bookkeeping which says that every financial transaction is booked in two sides and at least two different accounts. The rules are applied to show changes (increases, decreases) in the assets, liabilities and equity elements. It is often illustrated with T-Account (Warsono S., 2015).

According to the double-entry bookkeeping, each account has Debit or Credit Balance. Whether there is a Debit or Credit balance depends on the type of account. The balance which is expected in a specific account is the normal account balance (Ellerman D., 2014).

The accounts and their normal balances

The following table shows normal balances of the basic accounts:

Debit (DT) Credit (CT)
Assets Contra Asset
Contra Liability Liability
Expenses Revenues
Losses Gains
Dividends Account Owner's Equity
Stockholder's Equity

Differentiation between Credit and Debit Balances

Differentiation between Credit and Debit balances exists because of absence of a negative value in monetary units. It was the reason for creating a method of bookkeeping in which are used only positive values. The use of negative numbers to show the financial data is forbidden. In this regard, to reflect the decrease in monetary value, there arose the idea of using two sides and transferring what would be a negative number on one side and the number which would be positive to the other side. It is widely accepted that debits are booked on the left side and credits being booked on the right side (Warsono S., 2015).

There is the general rule which says that the amount of Credit balances is equal to the amount of Debit balances. It is connected with entering each financial transaction in two sides and the absence of a negative value (Heeffer A., 2011).

References

Author: Joanna Trąbka