3. Determining Normal Balances For Assets & Liabilities

All right, this is what we've all been waiting for, determining normal balances. By normal, I mean positive. So we are trying to determine normal balances of accounts. So you've seen me draw this a couple times, cash, and then I've come over here and put a plus sign, and over here I've put the opposite, a minus sign. This is what we're trying to figure out. We're trying to figure out what side of each account is its plus side or its increase side, and it's kind of important that you know how to do it for cash. It's kind of important. You can remember cash pretty easily, though.

You can memorize cash, left side, positive, right side, negative. Here's the issue, though. There's cash, there's accounts receivable, there's accounts payable, there are revenues, there are expenses, there are dividends, and the list goes on and on and on and on, right? So yeah, you may be able to memorize cash, but do you really wanna memorize all these? There's a whole bunch of them that you're gonna have to be able to figure out. You may actually see one on a test that you've never seen before, and if you don't know how to figure it out, you're gonna be in big trouble. So let's talk about how to figure it out.

If you will recall, the accounting equation is assets equals liabilities plus owner's equity or shareholder's equity. Now, here's something. That little equal sign separates the left side from the right side. So this is the left side of the equation, and this is the right side of the equation.

And look up here, we've got a left side of an account, and we've got a right side of an account. We may be onto something here. If you watched the debits and credits video, you'll remember that debit means left and credit means right. Those words mean the exact same thing. If you haven't watched that video yet, you should probably go back and watch it. It's super critical. So now we're getting closer. We've got some accounts. We've got assets, liabilities, and owner's equity, and we've got some sides, right? I just wrote down left and right over these accounts, so that makes you think we're onto something, and we are.

All assets have normal balances of debit. Debit is a normal balance for an asset. All liabilities and all owner's equity have normal credit balances, okay? So that's how I figured out cash has a normal balance of debit. So anything I put on this side increases the cash account, and anything I put on this side decreases the cash account, okay? And I figured that out because I thought, okay, cash is an asset. Assets live on the left side of the equation. Well, longer arrow, left side of the equation. The left side means debit 'cause the word left actually means debit. Debit and left are the same word.

So cash has a normal balance of debit, and normal just means plus, positive. Normal is positive. So I can put the plus sign over here. So if somebody says, "Debit cash for $500," what does that mean? Well, literally, that means put $500 in the cash account on the left side. Okay. That's straightforward enough.

But what that means to you and me is cash increased by $500, and we know that because cash has a normal balance of debit, and we just put $500 on that side, right? So then if nothing else happens, the ending balance in cash is $500. Let's look at another one. Let's look at accounts payable.

And if you'll remember, accounts payable is a liability because these are accounts that we have to pay, and because in the future we're gonna have to pay them, that means it's a liability, right? So my question to you is, accounts payable, if I said increase accounts payable by $1,000, would you know what to do?

Notice I didn't say debit or credit 'cause debit or credit would give it away 'cause debit and credit mean left and right. All I said is increase it by $1,000. Well, shoot, now you gotta figure out which side is the increase. Is this the increase, or is this the decrease? Is this the increase, or is this the decrease? Okay. Well, let's see if we can do it. Let's do it down here. Accounts payable, since we know we have to pay it, we know it's a liability.

We know liabilities live on the right side, live on this side, so we know liabilities are on the right side, and anything on the right side, since right means credit, has a normal credit balance. So that means for accounts payable, the plus goes on the right side, and the minus goes on the left side.

Do you see how we figured out everything we need to know just by walking down this chain of logic? We didn't really do any problem solving. We just put together pieces that we already knew. We knew accounts payable was a liability. We knew liabilities live on the right side of the equation, and we knew that right and credit are the same word. So we didn't actually solve, like, we didn't use our brains at all. We just walked down the chain of logic. So now I told you increase accounts payable by 1,000 bucks. We just figured out the normal balance is over here. So to increase accounts payable, you would credit it just like that.

So I hope you're feeling pretty good so far about this. I'm hoping that you can follow this chain of logic right here. If you can remember the accounting equation, you can remember every single account and how to determine what side is used for the increase, what is its normal balance.

Let's just do a quick recap. We started out by saying we're trying to determine normal balances. We're trying to determine which side increases an account. We said that there are a lot of accounts, and so you don't want to try to memorize them all. You want to try to learn why they are either debit or credit accounts.

So we started down here, and we said, "Let's start with cash." Cash is an asset. Assets live on the left side of the accounting equation. Left and debit are the same word. Therefore, cash has a normal debit balance, which means the plus goes on the left side.

So if I were to say debit cash for $500, well, we know that means put $500 in the cash account on the left side. But because we know that the left side is plus, that also means cash went up $500. We looked at a liability. We looked at accounts payable, and we said because we have to pay it back, we remember that that's kind of the definition of liability. And here I started by saying, just like up here, cash went up $500. I started by saying, "I want you to increase accounts payable by $1,000."

And so you may think, shoot, I don't know how to do that. Sure you do. Accounts payable is a liability. Liabilities go on the right side. You could stop there. The right side is another word for credit. So accounts payable has a normal credit balance in that you increase it by putting credits in it.

Now we will look at owner's equity and revenues and expenses. We'll look at all of those together in another video because those go together quite nicely.