What does the term "normal balance" in accounting refer to?

The term "normal balance" in accounting refers to the side of an account where increases are recorded. Each type of account has a normal balance that is generally associated with its nature. For example, asset accounts typically have a normal debit balance, which means they increase on the debit side. Conversely, liability and equity accounts have a normal credit balance, where increases are recorded on the credit side.

Understanding normal balances is essential for accurately recording transactions and maintaining the integrity of financial statements. When transactions occur, they must be recorded in accordance with the normal balances of the accounts affected to ensure that the accounting equation (Assets = Liabilities + Equity) remains in balance. This knowledge allows accountants to properly analyze financial data and make informed decisions based on the organization's financial position.