+
4 Tutorials that teach Natural Balance
Take your pick:
Natural Balance

Natural Balance

Author: Evan McLaughlin
Description:

In this lesson, the student will learn about the natural balance of every account.

(more)
See More
Try a College Course Free

Sophia’s self-paced online courses are a great way to save time and money as you earn credits eligible for transfer to over 2,000 colleges and universities.*

Begin Free Trial
No credit card required

28 Sophia partners guarantee credit transfer.

264 Institutions have accepted or given pre-approval for credit transfer.

* The American Council on Education's College Credit Recommendation Service (ACE Credit®) has evaluated and recommended college credit for 25 of Sophia’s online courses. More than 2,000 colleges and universities consider ACE CREDIT recommendations in determining the applicability to their course and degree programs.

Tutorial

"Natural Balance"

Video Transcription

Download PDF

Hey everyone, welcome to our video today on natural balance. So what does today's discussion cover? Well, we're going to discuss that topic, natural balance.

Let's look at the definition. That's the expected type of balance for a specific account classification. We're going to talk about that in a little more detail. And we're going to look at how it applies to our different account groups, so our assets, liabilities, equity, revenues, and expenses, as well as the individual accounts within those groups. And remember, accounts are associated with only one account group.

So now let's look at natural balances. What are they? Well, let's go back to that definition. It's the expected type of balance for a specific account classification. Type of balance. What does type of balance mean? That means is the balance typically going to be a debit or a credit. Well, how do we determine if it's a debit or a credit natural balance? Well, if the debits exceed the credits, that's considered a debit balance. And if the credits exceed the debits, that's a credit balance.

Now, each account group is typically going to have either a debit or a credit balance. And we'll talk about that specifically here as we go through some examples. But first, let's dive into this a little bit more.

So increases. Increases take place on the same side as the natural balance. So if we have an account that naturally has a debit balance, any increases in that account are going to be debits. And now decreases. Decreases in account occur on the opposite side as the natural balance. So if we have an account that has a typical credit balance as its natural balance, any debits to that account would be seen as decreasing that account.

So now let's look at some specific examples, starting with assets. The natural balance for our assets is a debit. So assets have a natural debit balance. So let's take an example. A cash sale, just focusing on the cash here. Cash is what? Is it increasing or decreasing, if we've made a sale? Cash is increasing, so our cash is going up. So we have an account with a natural debit balance, and it's increasing. So are we going to debit or credit that account? We're going to debit it.

Now, let's look at another example for revenues. The natural balance is credit. So our revenues have a natural credit balance. Let's take that same example, a cash sale, just focusing on the sale portion.

So our revenues are-- would they be increasing or decreasing? Our revenues are increasing. So if our revenues are increasing, and our natural balance is a credit, would it be debit or credit revenue? We're going to credit revenue because since it's increasing, that needs to go on the same side as our natural balance, which in this case is a credit.

Let's look at our next example. Let's look at our expenses. The natural balance is a debit. So expenses have a natural debit balance. Now, let's take this example. We're going to incur office expense on account.

So our expenses are increasing. So if our expenses are increasing, and they have a natural debit balance, are we going to debit or credit our expense? We're going to debit expense. It has a natural debit balance, and it's going up. And increases occur on the same side as the natural balance, so we're going to debit our expense.

Another example, our liabilities. The natural balance for liabilities is a credit. Let's take that same example we just looked at, incurring office expense on account, and let's focus on that on account portion. So our liabilities are increasing. So if our liabilities are increasing, the natural balance is a credit.

Would we debit or credit our liabilities? We're going to credit them. Because again, increases take place on the same side as the natural balance, which in this case is a credit.

Now let's look at our last account group. Let's look at equity. The natural balance is credit. Equity has a natural credit balance.

One more example, owner contribution. So in this case, the owner is contributing into the company. So equity is increasing or decreasing? Our equity's increasing. So if our equity is increasing, and the natural balance is a credit, are we going to debit or credit our equity? Again we're going to credit it. Because those increases take place on the same side as the natural balance.

So now, let's summarize everything we talked about today. In a nutshell, we talked about our natural balance, which is the expected type of balance for a specific account classification. Now let's look at this chart. We have these three columns, increased by, decreased by, and the natural balance of the account.

Starting with our first account group, assets. Assets are increased by debits. So then they're decreased by credits. And because they're increased by debits, the natural balance would also be a debit.

Now liabilities. They're increased by credits. So the opposite, they're decreased by debits. And again, the natural balance follows the increase. So since liabilities are increased by credits, the natural balance for liabilities is credits. Equity increased by a credit, decreased by debit. And the natural balance is the same as the increased by column. It's a credit for equity.

Revenues, they're also increased by credits, decreased by debits, and have a natural credit balance. And last but certainly not least, our expenses. They're increased by debits, decreased by credits, and again, the natural balance matches with the increased by column. So whatever these accounts are increased by, whether it's debits or credits, is going to be the same as the natural balance. I hope everybody enjoyed this video, and I hope to see you next time.

Terms to Know
Natural Balance

Expected type of balance for a specific account classification.