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Natural balance is the expected type of balance for a specific account classification. Type of balance refers to the fact that the balance is typically going to be a debit or a credit. Now, how do we determine if it's a debit or a credit natural balance?
Each account group is typically going to have either a debit or a credit balance.
Increases take place on the same side as the natural balance. If an account naturally has a debit balance, any increases in that account are going to be debits.
Decreases in account occur on the opposite side as the natural balance. If an account has a typical credit balance as its natural balance, any debits to that account would be seen as decreasing that account.
Suppose you have a cash sale. Is the cash increasing or decreasing if you've made a sale? The cash is increasing, or going up. You have an account with a natural debit balance, and it is increasing; therefore, you're going to debit it.
We will use the same example of a cash sale, just focusing on the sale portion. With a cash sale, your revenues are increasing. If your revenues are increasing, and your natural balance is a credit, it follows that you will credit revenue. Since revenues are increasing, it needs to go on the same side as the natural balance--which, in this case, is a credit.
In this example, let's suppose you incur office expense on account, meaning your expenses are increasing. If your expenses are increasing, and they have a natural debit balance, are you going to debit or credit your expense? Well, you're going to debit expense. It has a natural debit balance, and it's going up. Increases occur on the same side as the natural balance, so you're going to debit your expense.
Using the same example as above, incurring office expense on account, let's focus on that "on account" portion. Your liabilities are increasing. If your liabilities are increasing, the natural balance is a credit. Therefore, you're going to credit your liabilities, because, again, increases take place on the same side as the natural balance, which, in this case, is a credit.
Suppose you are an owner who is contributing into your company. Therefore, equity is increasing. If your equity is increasing, and the natural balance is a credit, are you going to debit or credit your equity? Again, you're going to credit your equity, because those increases take place on the same side as the natural balance.
| Natural Balance | Increased By | Decreased By | |
|---|---|---|---|
| Assets | Debit | Debit | Credit |
| Liabilities | Credit | Credit | Debit |
| Equity | Credit | Credit | Debit |
| Revenues | Credit | Credit | Debit |
| Expenses | Debit | Debit | Credit |
Source: Adapted from Sophia instructor Evan McLaughlin.
