Normal Balance
The normal balance is defined as the balance which would show either credit or debt when all the data from the journal is extracted. The normal balance is calculated by the accounting equation, which says that the assets of a company are equal to the sum of liabilities and shareholder’s equity. For accounts payable, the usual trend for the normal balance is usually credit.
It is because of the fact that most companies do not immediately pay their suppliers for goods or services, which means that these products or services are on credit, which would show the normal balance to be on the credit side.
Explanation
The accounting equation is Assets = Liabilities + Equity
This accounting equation is used to determine the normal balance of not only accounts payable but also accounts receivables.
For accounts receivables that are on the assets side, the normal balance is usually debit. But, for the accounts payable which are on the liabilities side, the normal balance is credit.
Whether the normal balance is in credit or debit, is determined by the accounting equation. If the assets are more than the sum of liabilities and equities, then the normal balance is on the debit side, and if the assets are less than the sum of liabilities and equities, then the normal balance is on the credit side. This is a common practice in double-entry bookkeeping.
Ultimately, the accounting equation determines whether the normal balance occurs on the debit or credit side.
Example
Consider a company ABC which gets supplies of spanners worth one thousand dollars from one of its suppliers. The ABC does not pay with cash but on credit. So, the liabilities side of the company has gone up by one thousand dollars. At the same time, the company has also gain assets worth one thousand dollars.
So, what would the normal balance be? The assets and liabilities would be equal, but the shareholder’s equity would not be. From the accounting equation, we can see that the normal balance would be on the credit side.
Contra Accounts
A contra account, also known as a contrast account, is which is used in normal balance for accounts. The contra account is an account that is usually the opposite of one of the other accounts.
The contra accounts appear directly below the real account in the financial statements. The purpose of the Contra accounts is usually to offset the balance from the original account.
For a credit account, the contra account is a debit account, and for a debit account, the contra account is a credit account. As a result, the natural balance of a contra account is always opposite to the original accounts.
Types of normal balances for accounts payable
Figure 1: Types of normal balance for accounts payable
The two main types of normal balance for accounts payables which are shown in figure 1 are credit and debit. These are further divided into sub-types which are explained in detail below:
Credit for normal balance
The credit is the usual version of the normal balance for the accounts payable. Every company has a usual paying period for the accounts receivables of about one to three months. During this period, the normal balance of the company for the account payable stays on the credit side.
Even if the companies pay all of their credit balances, the normal balance usually does not convert into debit. This is because companies do not usually extend credit to their suppliers, but the opposite usually happens. The sub-type for accounts payable normal balance, on the credit, is explained below:
Revenues
The revenues a company earns from selling the products are usually credit in accounts payables on the normal balance. This usually happens for the retailers, who sell the things they receive on credit to the consumer.
In this case, the revenue generated from the sale of the product from the supplier is usually shown as a credit on the accounts payable. This is how it is done in the double-entry bookkeeping method.
The revenue is shown as the credit side on the normal balance. Sometimes, the profit from selling the product from the supplier is also debited by the company.
Debit for normal balances
In extremely rare cases, the companies extend the credit to their suppliers. The big companies usually provide a credit line to their important suppliers during economic distress. The companies do that because if the suppliers go under, it can have an impact on the whole supply chain of the company, and ultimately this will also have an impact on the company’s operation itself.
In this case, the accounts payables, convert into accounts receivables from the suppliers. So, from the accounting equations, the assets side of the equation becomes higher than the sum of the equity and liabilities. In normal balance, the accounts payable shift to the Debit side. . The sub-type for accounts payable normal balance, on the debit, is explained below:
Expenses and losses
The expenses are recorded as a credit on the normal balance. This usually happens when the company extends credit to its suppliers; the credit is reported as an expense. The expense shifts the balance of the accounts payable from the credit side to the debit side. This result is obtained from the accounting equation.
Losses are also recorded as a debit on the normal balance.
Frequently asked questions
What is debit balance in accounts payable?
The normal balance shows debit in the accounts payable when the left side is positive. It means, according to the accounting equation, the assets for that accounts are higher than the sum of shareholders’ equity and liabilities.
This reflects the monetary amount for products or services from the suppliers that a company has received from one of its suppliers, but has not paid for it yet.
This is recorded on the normal balance as a debit for the company according to the double-entry bookkeeping method.
What is the entry for Accounts Payable?
There are two ways of how accounts payable are measured for entry in the accounting journal. The accounts payable are debited when the company receives a product or service from one of its suppliers, and when the accounts payable are paid, the same account is credited for an amount equal to the amount for which that particular product or service was purchased.
The expenses and losses are also debited on the normal balance of the accounts payable of a company’s balance sheet.
What are Accounts Payable examples?
Some examples of accounts payables are services such as transportation and logistics, licensing, or marketing services. These are the main types of services that are noted in the accounts payable.
The main products for which accounts payables are used by companies are raw materials, production equipment, and utilities. These are the main types of products for which companies have accounts payables.
All of these products or services are prime examples of accounts payable. The companies usually do not pay for these services or products in cash, because it can impact the cash positions in the balance sheets of the company.
Is Accounts Payable an asset?
No, accounts payable are not considered an asset. The accounts payables are noted as liabilities in the balance sheet. This is due to the fact that companies have to pay the account’s payables.
And any payments are considered as liabilities, whereas accounts receivables which are on the opposite side of the accounts receivables and are considered as assets, as opposed to liabilities which are what accounts payable are considered.
This is because the accounts receivables are those which the company would receive from the products or services which a company provided to its clients.
