What is the normal balance for owners' equity accounts?

Owners' equity accounts typically carry a credit balance. This is a fundamental principle in accounting, as these accounts represent the owners' residual interest in the assets of the business after liabilities have been deducted. Since owners' equity is essentially the net worth of the business, any increases in owners' equity (such as investments made by the owners or profits retained in the business) are recorded as credits. Conversely, withdrawals or losses reduce owners' equity and are recorded as debits.

Understanding this normal balance is key for accurate financial reporting and for ensuring that the accounting equation—Assets = Liabilities + Owners' Equity—remains balanced. This principle applies to all types of owners' equity accounts, including common stock, retained earnings, and additional paid-in capital.