Normal account balance
| Normal account balance |
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| 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).
Examples of Normal account balance
Normal account balance is a financial term used to describe the amount of money that is owed by one party to another. Generally, it is the amount of money that a person or entity has in its bank account.
Examples of Normal Account Balance include:
- The balance in an individual's checking account.
- The balance in an individual's savings account.
- The balance in a company's business checking account.
- The balance in a company's business savings account.
- The balance in an organization's investment account.
- The balance in an individual's retirement account.
- The balance in a government agency's account.
- The balance in a non-profit organization's account.
Advantages of Normal account balance
Normal account balance has many advantages for the user. These include:
- Ability to access funds quickly and securely: Normal account balance allows users to access funds quickly by using their debit and credit cards. It also ensures a high level of security since the user’s personal information is safeguarded by the bank.
- Ability to monitor activity easily: Normal account balance allows users to easily monitor and track their spending habits. This helps them to maintain a healthy financial lifestyle and avoid any unnecessary expenses.
- Ability to set up budget: By having a normal account balance, users can set up a budget to help them better manage their finances and save money. This can be done by setting up automatic payments, which will help them stay on track with their financial goals.
- Ability to earn interest: Normal account balance can help users earn interest on their deposits. This is because the bank pays interest on the account balance, which helps to increase the savings of the user.
Limitations of Normal account balance
Normal account balance is an important financial tool used to keep track of one's financial activities. However, it has certain drawbacks that need to be taken into account when using it. Some of the limitations of a normal account balance include:
- Inaccuracies due to manual recording of transactions – Human errors are common when it comes to recording transactions, which can lead to inaccurate figures in the normal account balance.
- Incorrect assumptions of account balance – It's possible for the normal account balance to be incorrect due to incorrect assumptions made about the balance. For example, if the account holder assumes that all transactions have gone through and have been recorded correctly, the actual balance may be different.
- Lack of real-time updates – The normal account balance does not provide real-time updates, which can be a problem when trying to keep track of the account on a regular basis.
- Difficulty in tracking of transactions – Tracking transactions can be difficult when relying on the normal account balance, as it does not provide detailed information about each transaction.
- Limited information – The normal account balance only provides limited information. It does not provide detailed information such as the date, amount, and purpose of each transaction.
- No access to other financial data – The normal account balance does not provide access to other financial data such as credit or debit card transactions, investments, or other bank accounts.
- Zero Balance Account: A zero balance account is a type of bank account designed to provide businesses with a convenient way to manage their finances. It is essentially a checking account set up to maintain a balance of zero, which means that the business can draw from the account as needed without worrying about maintaining a minimum balance.
- Sweep Account: A sweep account is a type of bank account that automatically transfers any excess cash into a higher-yielding investment account. The account is typically used by businesses that need to manage their cash flow more efficiently, as it allows them to take advantage of higher interest rates without having to manually transfer money.
- Money Market Account: A money market account is a type of savings account that offers higher interest rates than a traditional savings account. Money market accounts are typically used by individuals and businesses that are looking to save money over a longer period of time and earn higher returns than a regular savings account.
In summary, other approaches related to Normal Account Balances include Zero Balance Accounts, Sweep Accounts, and Money Market Accounts. Each of these accounts offers different features that businesses can use to manage their finances more efficiently.
References
- Ellerman D., (1985), The mathematics of double entry bookkeeping. , "Mathematics Magazine", Vol.58, No.4.
- Ellerman D., (2014), On double-entry bookkeeping: The mathematical treatment. "Accounting Education", Vol.23, No.5.
- Heeffer A., (2011), On the curious historical coincidence of algebra and double-entry bookkeeping., "In Foundations of the Formal Sciences VII: Bringing together philosophy and Sociology of Science", Vol. 32, No. 7.
- Lin Z., (1992), Chinese double-entry bookkeeping before the nineteenth century., "Accounting Historians Journal", Vol.19, No. 2.
- Ryan J., (2014), Historical Note: Did double-entry bookkeeping contribute to economic development, specifically the introduction of capitalism?, "Business and Finance Journal", Vol.8, No.3.
- Warsono S., (2015), The Rationality of Rules of Debit and Credit, SSRN, Indonesia.
- Yamey B., (1947),Notes on the origin of double-entry bookkeeping., " The Accounting Review", Vol.22, No. 3.
Author: Joanna Trąbka
