Track 1 · Debits, credits and double entry
Account types and normal balances
Classify accounts into assets, liabilities, equity, income and expenses, and learn each account's normal balance — including contra accounts.
You will be able to
- Classify accounts into the five elements.
- State each account's normal balance.
- Explain contra accounts and compute the net amounts they produce.
- Spot balances on the unusual side and say what they suggest.
Builds on
Every account belongs to one of five elements. Ask what the account represents, not what its name sounds like:
- Assets — resources the business controls that should bring future benefits (cash, receivables, inventory, prepayments, equipment).
- Liabilities — obligations to transfer resources or provide services later (payables, loans, salaries owed, unearned revenue).
- Equity — the owners' residual interest (share capital, retained earnings) and distributions to owners (dividends).
- Income — increases in equity from the period's activities (sales, service revenue, interest earned).
- Expenses — decreases in equity from the period's activities (salaries, rent, cost of sales, depreciation).
Names can mislead. Prepaid insurance is an asset (cover still to come), not an expense. Unearned revenue is a liability (work still owed), not income. Dividends reduce equity but are not an expense — they are a distribution to owners.
Normal balances
An account's normal balance is the side on which it increases, so it is the side its balance usually sits on: debit for assets, expenses and dividends; credit for liabilities, equity and income.
Contra accounts
A contra account is paired with another account and carries the opposite balance, reducing it on the statements without changing the original figure. That keeps useful information visible:
- Accumulated depreciation (credit) reduces equipment (debit), so readers see both the original cost and how much has been used up.
- Allowance for credit losses (credit) reduces accounts receivable, so the full amount invoiced stays on record while the estimate of what won't be collected is shown separately.
- Sales returns and allowances (debit) reduces sales revenue, so management can see how much is being returned.
Permanent and temporary accounts
Assets, liabilities and equity accounts are permanent: their balances carry forward from one period to the next. Income, expense and dividend accounts are temporary: they collect one period's activity and are closed to retained earnings at the period end, so they start the next period at zero.
Warning signs
A balance on the unusual side is a signal to investigate. A credit balance in cash means an overdraft (or an error). A debit balance in accounts payable may mean a supplier was paid twice. A credit balance in an expense account usually means something was posted to the wrong side.
| Element | Normal balance | Examples from the chart | Carried forward? |
|---|---|---|---|
| Asset | Debit | 1000 Cash at bank, 1100 Accounts receivable, 1310 Prepaid rent, 1500 Equipment | Yes (permanent) |
| Contra-asset | Credit | 1150 Allowance for credit losses, 1510 Accumulated depreciation — equipment | Yes (permanent) |
| Liability | Credit | 2000 Accounts payable, 2110 Salaries payable, 2200 Unearned revenue, 2500 Bank loan | Yes (permanent) |
| Equity | Credit | 3000 Share capital, 3100 Retained earnings | Yes (permanent) |
| Dividends | Debit | 3200 Dividends declared | No (closed) |
| Income | Credit | 4100 Service revenue, 4900 Interest income | No (closed) |
| Contra-revenue | Debit | 4200 Sales returns and allowances | No (closed) |
| Expense | Debit | 5000 Cost of sales, 6000 Salaries expense, 6100 Rent expense | No (closed) |
| Amount | |
|---|---|
| Equipment, at cost (debit balance) | 12,720 |
| Less: accumulated depreciation (credit balance) | (2,295) |
| Carrying amount shown in the statement of financial position | 10,425 |
Practice
Practising as a guest — attempts aren't saved.
Exercise 1 · Classify
Classify each account into its element.
Exercise 2 · Classify
What is each account's normal balance?
Exercise 3 · Classify
At its year end, 31 December, which of Lumen's accounts carry their balance into 2027, and which are closed to retained earnings?
Exercise 4 · Calculate
Lumen's trial balance at 30 June shows Equipment 12,720 (debit) and Accumulated depreciation — equipment 705 (credit). What carrying amount is shown for equipment in the statement of financial position?
Exercise 5 · Worksheet
Fernway Bikes' trial balance includes three contra accounts. Complete the net amount that each pair produces in the statements.
Exercise 6 · Concept check
The trial balance shows Accounts payable with a debit balance of 350. What is the most likely explanation?
Exercise 7 · Classify
Challenge: you're reviewing Marigold Bakery's month-end trial balance before it goes to the owner. Which balances look normal, and which should you investigate before the statements are prepared?
Key points
- Classify an account by what it represents: resource, obligation, owners' interest, or the period's performance.
- Normal balance = the side that increases the account.
- Contra accounts carry the opposite balance and are netted off, keeping the original figure visible.
- Income, expense and dividend accounts are closed each period; balance sheet accounts carry forward.
- A balance on the unusual side is a signal to investigate.
Content review: answers and figures are checked by automated tests against the accounting engine, and the text has had an internal review against the standards; independent review by a qualified accountant is pending.