Legal Definitions - normal balance

The term "normal balance" refers to the expected type of balance (either a debit or a credit) that a specific accounting ledger account typically carries, and which causes that account's value to increase. In essence, it indicates the side of the ledger where increases to that account are recorded. Understanding the normal balance is fundamental for accurately recording financial transactions and interpreting a company's financial health.

• Example 1: A Company's "Service Revenue" Account

  Imagine a consulting firm that provides advice to clients. When the firm completes a project and bills a client, its "Service Revenue" account increases. Revenue accounts are designed to increase with credit entries. Therefore, the normal balance for a Service Revenue account is a credit. If this account showed a debit balance, it would signal an unusual event, such as a significant client refund or an accounting error, because debits typically decrease revenue accounts.

• Example 2: A Retail Store's "Rent Expense" Account

  Consider a clothing boutique that pays monthly rent for its storefront. Each time the boutique pays or accrues rent, its "Rent Expense" account increases. Expense accounts are designed to increase with debit entries. Consequently, the normal balance for a Rent Expense account is a debit. Finding a credit balance in this account would be highly unusual, possibly indicating a landlord's refund or a significant adjustment.

• Example 3: A Manufacturer's "Accounts Payable" Account

  Suppose a manufacturing company purchases raw materials from a supplier on credit. This transaction increases the amount of money the company owes, which is recorded in its "Accounts Payable" account. "Accounts Payable" is a liability account, and liability accounts are designed to increase with credit entries. Thus, the normal balance for an Accounts Payable account is a credit. A debit balance in this account would suggest the company has overpaid its supplier or received a substantial discount, which is not its typical state.