Problem 28 - Accounting

Question

What is the normal balance of the following accounts: (a) Sales, (b) Sales Discounts, (c) Sales Returns and Allowances, (d) Cost of Merchandise Sold, (e) Delivery Expense, (f) Merchandise Inventory, (g) Sales Tax Payable?

Step-by-Step Solution

Answer

Sales have normal credit balances; Sales Discounts, Sales Returns, Cost of Merchandise Sold, Delivery Expense, and Merchandise Inventory have normal debit balances; Sales Tax Payable has a normal credit balance.

Step 1: Understand the Account Types

To determine the normal balance of an account, first, identify the type of account each belongs to. The accounts in question relate to revenues, expenses, assets, and liabilities. Sales is a revenue account; Sales Discounts and Sales Returns and Allowances are contra-revenue accounts. Cost of Merchandise Sold is an expense account. Delivery Expense is also an expense account. Merchandise Inventory is an asset account, and Sales Tax Payable is a liability account.

Step 2: Define Normal Balances for Each Account Type

Accounts have normal debit or credit balances, which help in determining their default increased side. Revenue accounts like Sales normally have a credit balance. Expense accounts such as Cost of Merchandise Sold and Delivery Expense normally have a debit balance. Asset accounts like Merchandise Inventory also have a normal debit balance. Liability accounts such as Sales Tax Payable have a normal credit balance. Contra-revenue accounts like Sales Discounts and Sales Returns and Allowances have a normal debit balance, opposite to revenue accounts.

Step 3: Determine Normal Balances for Specific Accounts

Based on the definitions: (a) Sales: Revenue, normal credit balance. (b) Sales Discounts: Contra-revenue, normal debit balance. (c) Sales Returns and Allowances: Contra-revenue, normal debit balance. (d) Cost of Merchandise Sold: Expense, normal debit balance. (e) Delivery Expense: Expense, normal debit balance. (f) Merchandise Inventory: Asset, normal debit balance. (g) Sales Tax Payable: Liability, normal credit balance.

Key Concepts

Account Types

In financial accounting, understanding account types is crucial as it lays the foundation for further analysis and proper bookkeeping. Accounts can be categorized into several groups:

• Assets
• Liabilities
• Revenues
• Expenses
• Equity

Knowing which category an account falls into helps determine its normal balance. For example, assets and expenses typically have a normal debit balance. They increase on the debit side. On the other hand, liabilities, revenues, and equity have a normal credit balance, increasing on the credit side. Understanding these distinctions helps in correctly recording financial transactions and contributing to the overall accuracy of financial statements.

Financial Accounting

Financial accounting is a specialized branch of accounting that involves the process of recording, summarizing, and reporting a company's financial transactions. One of its primary functions is to ensure the financial statements provide an accurate and fair view of the company’s financial performance and position.

Financial accounting is governed by standard principles and guidelines, such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), depending on the region. These standards ensure consistency, reliability, and comparability of financial data across different organizations, making financial accounting vital for stakeholders such as investors, creditors, and regulatory agencies. In practice, this involves maintaining a systematic record of transactions to prepare essential financial statements, including the balance sheet, income statement, and cash flow statement.

Debit and Credit Balances

Understanding debit and credit balances is foundational in managing account records. Accounts have a designated normal balance, referring to the side (debit or credit) that increases the account.

• Debit Balance: Found in asset and expense accounts. These accounts increase with debits and decrease with credits. Examples include Merchandise Inventory and Delivery Expense.
• Credit Balance: Found in liability, equity, and revenue accounts. These increase with credits and decrease with debits, such as Sales and Sales Tax Payable.

Special accounts like contra-revenue or contra-asset accounts, such as Sales Discounts and Allowances, have opposing normal balances to their primary account type, usually a debit. Mastering these concepts is essential for accurately documenting and assessing financial activities.