What is an account balance? A guide to debits, credits, and normal balances

Whether you’re part of a lean team with no in-house accountant or you’re a founder managing the books yourself, having a basic understanding of bookkeeping is essential. Knowing how key elements — like account balances, debits, and credits — work will help you to understand what your company owns, owes, earns, and spends, so you have the full context needed to inform everyday financial decisions.

In this article, we’ll cover accounting basics with examples relevant to early-stage B2B startups. By the end, you’ll feel more confident managing company finances, communicating with accountants, and making informed operating decisions for your business.

Each account — such as cash, accounts receivable, accounts payable, revenue, loans, and expenses — has a balance. Whenever a new transaction is recorded, the balance changes. It can increase or decrease depending on the type of account it is and whether you are recording debits or credits. So, an account balance is the total amount that’s been recorded in a specific account in your company’s general ledger at a specific point in time. It reflects the net effect of all debits and credits recorded in that account.

For example, if your business has $10,000 in its cash account and you pay a $3,000 bill, then the cash account balance will decrease to $7,000.

Account balance vs. bank balance: What’s the difference?

Here’s the key difference between an account balance and a bank balance:

• Account balance: This is an accounting term for the balance of any account in your general ledger.
• Bank balance: This is the amount of money shown in a specific bank account.

The balance of the cash account in your books and the balance shown by your bank may differ from time to time because transactions haven’t cleared yet or bank fees that haven’t been recorded in your books, for example. Be sure to do regular bank reconciliation. This will help you compare the two balances, identify differences, and keep your financial records accurate.

In double-entry accounting, debits and credits are types of entries used to record transactions. Every transaction in your business impacts at least two accounts and has at least one debit and one credit. The total debits must always equal the total credits.

How do debits and credits affect account balances?

You may have heard that debits decrease money in your business and credits increase it, but that’s not always the case. (This is a common bookkeeping mistake.) Whether a debit or credit increases or decreases an account balance actually depends on the type of account.

For example, in your assets account, debits increase the balance, whereas credits decrease it. The same goes for your expenses account. However, in your liabilities account, credits increase the balance and debits decrease it — and this is the same for your equity and revenue accounts, too.

Sound confusing? Once you understand normal balance (which we cover in the next section), it will click.

A normal balance in accounting is the side of the account, either debit or credit, which is increasing (positive). For debit, normal balances are usually assets and expenses, whereas for credit, normal balances are usually liabilities, equity, and revenue.

Here’s a simple reference table that you can use to better understand the normal balance of accounts.

Why does an account’s normal balance matter?

A normal balance helps you understand whether a debit or credit will increase an account. This information will help you record transactions correctly and keep your books clean. It also helps you interpret your financial records correctly and spot any errors before they create a major issue.

When you have a clear understanding of your company’s finances you can make more informed business decisions, such as whether now is a good time to buy new office furniture or whether you should limit your monthly subscriptions to conserve cash, for instance.

The difference between debit and credit in accounting can be complicated, especially if you’re new to bookkeeping and just starting to understand normal balances. To help you understand these concepts further, take a look at these debit account and credit account examples:

• Purchasing a laptop: If you buy a laptop for a new employee with $1,000 in cash, you’ll debit your equipment account $1,000 and credit your cash account $1,000. So, your cash account decreases while your equipment account increases.
• Receiving a customer payment: If you receive $2,000 from a customer for revenue you've earned, you debit your cash account $2,000 and credit your revenue account $2,000. Both your cash and revenue accounts will increase.
• Paying a monthly software bill: If you pay $200 for a monthly SaaS subscription, you’ll debit your software expense account $200 and credit your cash account $200. So, your software expense increases while your cash account decreases.
• Taking out a loan: If you borrow $25,000 from a bank, you’ll debit your cash account $25,000 and credit your loan payable account $25,000. Both your cash and loan payable accounts will increase.

If this seems overwhelming, keep in mind that assets and expenses normally carry debit balances while liabilities, equity, and revenue normally carry credit balances.

Small business accounting is no easy feat because most founders are working as a jack-of-all-trades. Although small errors here and there are bound to happen, be sure to avoid these major traps. Here are a few things not to do when interpreting debits, credits, and account balances.

Don’t assume that debits always decrease an account

Debits don't always decrease an account. They increase assets and expenses but decrease liabilities, equity, and revenue. Whether a debit increases or decreases a balance depends on the type of account and its normal balance.

Don’t assume that credits always increase an account

The same goes for credits. They increase liabilities, equity, and revenue but decrease assets and expenses. Again, the effect depends on the type of account you're working with.

Don’t focus on only one side of the transaction

In double-entry accounting, every transaction must affect at least two accounts, and the total debits must equal the total credits. If you record only one side of a transaction, your books won't balance correctly.

Don’t worry that an unusual account balance means that you’ve made a mistake

An account can sometimes have a balance that’s opposite to its normal balance. For example, accounts receivable normally has a debit balance, but if a customer accidentally overpays you, then it might have a temporary credit balance.

Don’t feel like you have to do it manually

Bookkeeping software or accounting software for startups are excellent tools that can reduce manual work and help you keep your ledger clean, up to date, and accurate. They also help you pinpoint issues before they snowball.

Don’t leave your books a mess

If your debits, credits, and account balances are getting murky, it’s best to hire a bookkeeper or accountant to help you get your books in shape. These professionals can also help you to interpret your accounts and understand your company’s financial footing. Just be sure to clean up your books before you pass them over to an expert.

Each account balance shows you what’s happening in different areas of your business. For example:

• Asset balances show you what your business owns or has direct control over, such as cash, accounts receivable, and equipment.
• Liability balances tell you what your business owes, like loans or unpaid bills.
• Equity balances show you the owners’ interest in the business.
• Revenue balances tell you how much income you earn from business activities.
• Expense balances show you the costs that you incur to operate your business.

Your account balances flow into your financial statements, like your balance sheet and income statement. From these statements, you can understand the profitability of your business, which resources you have available, your financial obligations, and your overall financial position. A single account balance alone can’t convey the health of your business. But when looking at them together, a clearer picture will come into view and you can use that information to make informed decisions about strategy and growth.

You don’t have to be an accounting expert to understand debits, credits, and normal balances. If you’re ever confused, start by identifying the type of account you’re looking at. Remember that assets and expenses normally increase with debits, whereas liabilities, equity, and revenue increase with credits. This will help you figure out how to record individual transactions and change account balances.

Understanding these basics will help you more accurately interpret financial records, recognize when something looks off, and make informed decisions about your business. It will also help you have better conversations with accountants and bookkeepers as you grow your company. With Mercury, you can automate the manual work behind bookkeeping, from categorizing transactions to reconciling your books. Discover more ways to automate your bookkeeping.