Accounting & Payroll Blog

Computer software can do everything a bookkeeper needs–except for bookkeeping.

An account’s normal balance is the side on which an increase is recorded. Some accounts have a normal debit balance; others, a normal credit balance.

As you know,

• asset accounts have a normal debit balance
• liability accounts have a normal credit balance
• owners’ equity accounts have a normal credit balance
• revenue accounts have a normal credit balance
• and expense accounts have a normal debit balance

That means if you spot an expense account on the trial balance with a credit balance or a liability with a debit balance, you want to examine it before you actually do your trial balance and make the adjustments But what about the normal balance of contra accounts? A contra account is directly related to a specific asset, liability or stockholders’ (owners’) equity, revenue or expense account–but has the opposite normal balance of its related account.

Here are some examples:

· Asset contra accounts. Accounts Receivable has a debit balance; its contra account, Allowance for Doubtful Accounts, has a credit balance.
Equipment has a debit balance; its contra account, Accumulated Depreciation–Equipment, has a credit balance.

· Liability contra accounts. Bonds Payable has a credit balance; its contra account, Discount on Bonds Payable, has a debit balance. · Owners’ equity contra accounts. Most owners’ equity accounts have a normal credit balance, but Treasury Stock has a debit balance and is treated as a contra account to total Owners’ Equity (rather than to a particular account). Dividends Declared has a debit balance and is a contra account to Retained Earnings.

· Revenue contra accounts. Sales has a credit balance; its contra accounts, Sales Discounts and Sales Returns and Allowances, have debit balances. · Expense contra accounts. Purchases has a debit balance; its contra accounts, Purchase Discounts and Purchase Returns and Allowances, have credit balances.

When Correct Account Balances May Not Be Normal Generally, an account balance that is not normal is incorrect, but there are exceptions. For example, if a company overdraws its bank account, the Cash account (normal debit balance) will have a temporary credit balance. Similarly, if bills are overpaid, Accounts Payable (normal credit balance) may have a temporary debit balance. If a company is operating at a loss, Retained Earnings (credit balance) may have a debit balance. Eying the Trial Balance When reviewing the trial balance for errors, the first step is to eye the accounts to see that each account’s balance is in the proper debit or credit column. Source: AIPB