Normal Balances

Definition

An account's normal balance is the side on which increases are recorded, and therefore the side on which a healthy, non-contra balance should appear. Assets and expenses are debit-normal. Liabilities, equity, and revenue are credit-normal. Recognizing normal balances is the fastest way to spot a posting error: a credit balance in a cash account or a debit balance in revenue is almost always a mistake.

Key rules

• Contra accounts always sit opposite to their parent and reduce the parent on the financial statements.
• Shareholder loan accounts can swing between debit and credit. A debit balance means the owner owes the corporation and triggers ITA 15(2) review.
• A negative balance on a normal-balance account is possible but unusual and should always be explained (for example, a bank overdraft reported under current liabilities).

Example

A partial pre-adjustment trial balance for a BC consulting corporation at March 31:

Account                        Debit      Credit
Cash                           12,400
Accounts Receivable             6,300
Accumulated Depreciation                  1,800
Accounts Payable                          2,100
GST Payable                                 540
Share Capital                            10,000
Retained Earnings                         1,900
Consulting Revenue                       18,000
Rent Expense                    3,000
Software Expense                  640
Salaries Expense               12,000
                              -------  -------
                              34,340    34,340

Every account sits on its normal side. Accumulated depreciation is credit-normal because it is a contra-asset.

Common mistakes

• Recording GST paid on purchases to GST Payable (a credit-normal liability) rather than to an ITC receivable or to GST Payable as a debit reducing the liability.
• Posting a customer refund as revenue with a negative sign instead of using contra-revenue.
• Leaving accumulated depreciation on the debit side because it "reduces" the asset. It is credit-normal.
• Letting retained earnings show a debit balance without disclosing the accumulated deficit on the balance sheet.
• Using a shareholder loan account as a dumping ground for unclassified personal charges, which can flip it into an asset position without detection.

Related concepts

Normal balances are the practical shortcut for applying debits and credits quickly. They also give the first sanity check on any trial balance: if a credit-normal account appears in the debit column, something has been posted backwards. Contra-account logic is revisited in asset topics such as capital cost allowance.