What is normal balance? This question always comes up when you are learning about accounting. Normal balance is basically an accounting classification of a financial transaction. It is an indispensable part of double-entry Book-entry system. Double-entry Book-entry system refers to the technique of recording financial transactions in a book with an account number, date, transaction amount, gain or loss and balance.
The normal balance of a company should be considered as the mean average value of all the balances in the company. If there is variation in the profit margin or revenue percentage, it will lead to variation in the normal balance of the company. This condition is called net income balance. It indicates the difference between total income and the net income, less the expenses. If the net income is more than the total income, the profit margin is positive and vice versa.
The normal balance of a company should be considered as a mean average value over a period of one year. It shows the trend over a period of time. A trend can be considered as a normal situation that may last for several years. So, the normal balance of a company may be calculated from the start of the new trading year to the end of the year ending. The calculation of the normal balance is done by taking the transaction volume in the first half of the year, and comparing it with the transaction volume in the second half of the year.
The normal balance of a company should be based on transactions in which the company gained its income. The transactions in which the company incurred its income should be taken into consideration only. Normally, the first half of the year has high transaction volume while the second half of the year has low transaction volume. So, the normal balance of the company should be calculated by taking the difference between the high and low transaction volumes in the first half of the year and then comparing it with the low transaction volume in the second half of the year. It should be known that in a normal situation, a company would not have much cash accumulation or cash outflow.
The normal balance of a company is normally calculated as the income at year end less the current expenses plus the current income taxes less the net income of the company after deducting the profit or loss of the company. The income statement is usually prepared by the CPA for the company. The normal balance is important because it indicates the actual condition of the company at the end of the reporting period. There are several reasons why the normal balance should be calculated. The most common reasons are to ensure the allocation of capital gains and tax liability appropriately.
This balance is different from the profit and loss balance because the purpose of this balance is to show the actual profit generated from the business rather than the profit made by the business during the reporting period. The normal balance is required to be prepared every year. It has been recommended that this balance be prepared annually because there can be fluctuations between the reported profit and actual profit which could cause an under-reporting of profits or an under reporting of losses. This balance may also be used to evaluate equity during certain years in a company’s history. Other uses of the normal balance include the reconciliation of assets and liabilities to determine their fair market value and to assist with financing decisions.
There are several reasons why a company might want to calculate a normal balance. A normal balance allows the CPA to correctly allocate the profits and losses of the business to existing equity, which is important when one considers raising additional capital for the business. This balance can also be used by investors to evaluate the performance of a company based on the information contained in the normal balance. Usually the normal balance will show an accurate presentation of the company’s profit and loss statements for the past three years.
In order to calculate a normal balance, the bank will need the income statement, balance sheet, and cash flow analysis for the company. These documents will be necessary for the bank to determine the profit and loss statement and to obtain an accurate measurement of the company’s normal revenue, expense, and net income. The normal balance will show the operating profit and loss and will show the net income statement. These documents will be required when a company is considered for investment in order to raise capital for growth or other reasons.