Which Ledger Accounts Will Normally Have Credit Balances?
Do you know that some accounts will usually have debit balances, while some will typically have credit balances? In accounting, having a debit balance (Also see Which Ledger Accounts Will Normally Have Debit Balances?) means that the amount on the debit side of the ledger will be greater than that of the credit side. As against, a credit balance is an extra amount on the credit side when compared to the debit side. If you do not know the normal balances of the accounts, you should not attempt to do the bookkeeping-related tasks on your own as you may end up confusing yourself. Instead, hiring an bookkeeping firm in Singapore will be a better choice for you.
According to the basic accounting principles, the ledger accounts that typically have credit balances are the ledger accounts of income, liabilities, provisions, reserves, capital and others.
Income refers to the revenues and gains that the company has earned from its operating and non-operating activities. The basic rules of bookkeeping (Also see Vital Elements in Bookkeeping) require the accountants to debit all business transactions in the nature of expenses, as well as credit those that with the nature of income. Hence, the accounts that are revenue in nature, for example, sales, commissions, capital gains and interest income have a credit balance.
On the other hand, liabilities refer to the dues that arise from transactions that the company has an obligation to fulfil. There are a few types of liability account, such as the accounts for current liability, non-current liability, as well as financial instrument payable. When accounting for personal accounts (the accounts which are related to a person or a company), the accountants should debit the party that receives the payment and credit the party that make the payment (Also see How Do Accountants Carry Out the Accounting Process?). Thus, liability accounts have credit balances too.
The term provision may not sound familiar to you if you are not familiar with bookkeeping and accounting. It means the amount that a company has set aside from the profit generated to get itself prepared for any uncertainty in the future. Generally, provisions are non-cash transactions. So, they do not involve the cash outflow when the company record an amount to become the provisions, and they have credit balances (Also see Provisions for the Depreciation of Fixed Assets).
Besides, reserves are the accumulated profits and retained earnings of the company, and they are the undistributed profits that are attributable to the company’s stakeholders. Some examples of reserves include capital reserve and general reserve. The purpose of keeping the reserves is to support future expansions, and they have an obligation to give out these profits to the entity’s stakeholder in the case of liquidation. Similar to provisions, reserves have a credit balance too.
Lastly, capital (Also see Accounting – What is a Capital Account) is the amount of money that the owner, partners, shareholders or founders have invested in a business. Similar to the situation above, the bookkeeping rule relating to personal accounts applies here too. In accounting, the business entity and its owner are treated as two different identities, and personal accounts show the amount that the organisation owes to its owners. Therefore, capital balances, such as capital accounts and paid-up capital, will usually have credit balances.