Balance Theory

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Balance theories might be of two types, the credit balance theory and the debit balance theory. The credit balance theory indicates the cash balances and the brokerage accounts of the investor that help in forecasting the trends in the market. This theory indicates that those investors who have cash in their accounts usually use that cash for buying marketable securities. When they will go to purchase them, then the demand for the securities will increase in the local markets which will ultimately increase their prices.

On the other hand when we talk about the debit balance theory, then this theory indicates the number of debts that are owed to the brokerage accounts of the investor. When the debit balance increases, then it is considered as a strong thing because it is always resulted from the purchase of securities of investors who are profitable.

The balance theory might also be referred to as the debit credit theory in the financial statements. Debit and credit are two things that are much important in the accounting cycle and they are opposite to each other. The theory of debit credit results in balancing the statements which in the end mean that all the finances in the debit side must be equal to all the finances in the credit side. Only then the financial statement or a ledger account will be equal. Simple addition and subtraction rules are applied in the balancing theory. CR is abbreviation of credit and DR is an abbreviation of debt. Debit is on the left side and credit is at the right side. However, it is not like that debit means increase and credit means decrease. The thing that is increased or decreased refers to the inflow and outflow of cash that would be resulting because of each transaction made by the business.

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