Now, let’s move on to discussing the concept of normalizing entries in accounting. Before diving into the normal balance of an account, it is essential to understand the types of accounts used in accounting. We’ve covered these in our prior lessons but we need to keep drilling these into your knowledge if you are just starting out.

One key difference is these accounts have historically been limited to six withdrawals and transfers per statement cycle. Some banks, though, have kept these terms in place, while others have made some adjustments. Another key difference from a high-yield savings account is that money-market accounts allow customers to write checks. Some high-yield savings accounts are now paying 5% or more, though most don’t pay that much. It has been decades since savings accounts have delivered an annual percentage yield at levels many high-yield products are right now (you can see some of the highest-paying savings accounts here).

Types of Accounts in Accounting (Quick Recap)

Accounts with balances that are the opposite of the normal balance are called contra accounts; hence contra revenue accounts will have debit balances. You’ll want to keep enough money in your checking account to reduce fees and—if you still use paper checks—to avoid bouncing a check. While you can avoid overdraft fees by linking a savings account to your checking account, banks may still charge fees if you spend beyond the balance in your account. On top of that, merchants may also charge a fee if they have to re-run a transaction because it didn’t go through the first time.

• These liabilities are typically short-term and are settled within a specified period, often referred to as the payment terms.
• To maintain the balance sheet equation, which states that the assets must equal liabilities plus equity, every transaction must be recorded with proper debits and credits.
• Let’s say there were a credit of $4,000 and a debit of $6,000 in the Accounts Payable account.
• Experts typically recommend keeping three to six months’ worth of living expenses stashed away for emergencies in a high-interest savings account.

The contra accounts noted in the preceding table are usually set up as reserve accounts against declines in the usual balance in the accounts with which they are paired. For example, a contra asset account such as the allowance for doubtful accounts contains a credit balance that is intended as a reserve against accounts receivable normal balance of accounts that will not be paid. The normal balance of an account refers to whether it is increased by debits or credits. That means if accounts payable increases overall credit balance also increased. The “normal balance” for an account in accounting refers to whether that account typically carries a debit or credit balance.

List of Normal Balances

Information presented below walks through specific accounting terminology, debit and credit, as well as what are considered normal balances for IU. As noted earlier, expenses are almost always debited, so we debit Wages Expense, increasing its account balance. Since your company did not yet pay its employees, the Cash account is not credited, instead, the credit is recorded in the liability account Wages Payable.

Since liabilities, equity (such as common stock), and revenues increase with a credit, their “normal” balance is a credit. Normal balance is a fundamental concept in accounting that determines the expected side or category where an account balance should appear. It helps ensure accurate recording, consistent classification, and reliable reporting of financial transactions. By understanding the normal balances of different accounts, accountants can maintain the integrity and usefulness of financial information. Accountants record increases in asset, expense, and owner’s drawing accounts on the debit side, and they record increases in liability, revenue, and owner’s capital accounts on the credit side. An account’s assigned normal balance is on the side where increases go because the increases in any account are usually greater than the decreases.