Using a chart of accounts to show you what the normal balance is for an account and how debit and credit entries affect the account can help you to identify data entry mistakes. If an account has a different balance than the normal balance, you should investigate why. For example, if your office equipment account shows a credit balance when it should be debit, this could indicate that there’s a error in the accounting equation and you may have to make some adjusting entries.
You should also know whether your office equipment account is a fixed asset account, which would then have a normal debit balance or an expense account, which would then have a credit balance. Fixed assets are items that you purchase that will depreciate over time, whereas expenses are the costs associated with running your business. If you have purchased equipment and it is recorded as a fixed asset, it will have a book value, which can be found by looking at the account in your financial statements. Expenses, on the other hand, are noted in your income statement and are used to determine net profit or net loss.
For example, you might have a drafting equipment account that records a cost of $20,000 when it should actually be an expense account. You can resolve this problem by making a journal entry to move the $20,000 from the drafting equipment account to an expense account so that it is reflected in your income statement.
In addition to moving the funds from one account to another, you can also use a chart of accounts to identify what the normal balance is for an account and what the effects of debit and credit entries are. For example, you will see that all assets, such as cash or supplies, should have a debit balance. Similarly, you will see that all liabilities and stockholders’ equity should have credit balances.
For instance, you will see that a company bought supplies for its employees with cash and it recorded the transaction in the Supplies account. However, the company also had a Accounts Payable account that was charged for the supplies it received from customers on credit, which would be recorded in the Accounts Payable account.