Which Accounts Carry a Credit Balance?

Accounts that typically have a credit balance are asset, liability, and equity accounts. However, there are some cases where an expense account may have a credit balance. This can happen when an organization pays in advance for something.

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Accounts That Always Have a Credit Balance

Accounts that always have a credit balance are called real accounts. The reason they are called this is because they are not related to the company’s owner.

Accounts Receivable

Many types of businesses have accounts that always carry a credit balance. The most common type of account with a credit balance is Accounts Receivable. Accounts Receivable is the amount of money owed to a company by its customers for goods or services that have been provided but not yet paid for. Other accounts that typically have a credit balance include Owner’s Equity and Unearned Revenue.

In order to find the credit balance for any given account, you will need to look at the account on the Balance Sheet. The Balance Sheet is a financial statement that provides a snapshot of a company’s assets, liabilities, and equity at a specific point in time. The Balance Sheet is divided into two sections: the left side (or “assets” side) and the right side (or “liabilities and equity” side). Accounts with a credit balance will always be found on the right side of the Balance Sheet.

Unearned Revenue

Unearned revenue is defined as money that a company has received for products or services that have not been delivered. In other words, it is a liability because the company still owes the customer something. This type of account is also sometimes called a deferred revenue account.

businesses may receive payment for services that have not yet been rendered, such as an annual subscription to a magazine. The company records the amount as unearned revenue, or deferred income, until it delivers the product or service. At that time, the amount becomes earned revenue.

Other types of businesses may receive payments in advance, such as landscapers who are paid for a season of work upfront. Once again, the payments are recorded as unearned revenue until the work is completed and then they become earned revenue.

Prepaid Expenses

Prepaid expenses are those paid in cash or with a check before the services are actually provided or the merchandise is received. Cash paid for insurance, for example, is a prepaid expense that provides coverage for a specific period of time in the future. Other types of prepaid expenses include office supplies, inventory, and rent.

Prepaid expenses are recorded as an asset on the balance sheet because they represent future benefits that have not yet been used up or expired. The journal entry to record a prepaid expense is a debit to the prepaid expense account and a credit to cash. When the services are received or the merchandise is used, the amount of the asset that has been used up is transferred from the prepaid expense account to another account such as office supplies expense or inventory. This second journal entry is a debit to the new expense account and a credit to the prepaid expense account.

Prepaid expenses are sometimes referred to as deferred charges because they represent services that have been paid for in advance but have not yet been used or consumed.

Accounts That Sometimes Have a Credit Balance

Accounts that typically have a credit balance are asset, liability, and equity accounts. However, there are a few exceptions. Revenue accounts can also have a credit balance if a company has returned items to its suppliers.

Inventory

For businesses that sell physical products, inventory is one of the most important accounts. You want to make sure you have enough inventory on hand to meet customer demand, but not so much that you tie up too much cash in stock. That’s why businesses closely track their inventory levels and
strive to keep the amount of inventory they carry at a minimum.

The good news is that inventory is not the only account that can have a credit balance. In fact, there are several types of accounts that may occasionally have a credit balance. Here are some examples:

-Accounts Receivable: This account tracks money owed to your business by customers. If you provide services on credit, or if customers do not pay their invoices immediately, this account will have a credit balance until payment is received.
-Prepaid Expenses: These are expenses paid for in advance, such as rent or insurance premiums. The prepaid expense will be recorded as an asset on your balance sheet until it is used up or expires, at which point it will be recorded as an expense on your income statement.
-Allowance for Bad Debts: This account is used to estimate the amount of receivables that will ultimately not be collected. It is a contra asset account, which means it has a credit balance that offsets the debit balance in Accounts Receivable.
-Unearned Revenue: This account tracks revenue that has been received but not yet earned. For example, if you sell annual subscriptions to your service, you will record the subscription fee as unearned revenue when it is paid, and then recognize it as earned revenue over the course of the year as the services are provided.

While it’s not necessarily desirable to have a lot of accounts with credit balances, it’s not cause for alarm if it happens from time to time. Just be sure to keep an eye on your credits and debits so that your books stay in balance!

Common Stock

Though it seems counterintuitive, a credit balance on the common stock account is possible. If a company issues stock below par, or if it repurchases its own stock at a price above the original par value, the common stock account will have a credit balance. For example, assume a company issues 10,000 shares of $5 par common stock for $12 per share. The credit to common stock would be $60,000 (10,000 shares x $12 per share). If the company later repurchased 1,000 shares of its common stock for $20 per share, the credit balance in the common stock account would increase to $70,000 ((10,000 x $12 per share) + (1,000 x $20 per share)).

Service Revenue

Service revenue is one example of an account that may have a credit balance. Service revenue includes money that a company earns from providing services to its customers. This account is found in the income statement.

Other accounts that may have a credit balance include:
– Unearned revenue: This is money that a company has received but has not yet earned. An example would be a prepayment for services that have not yet been provided. Unearned revenue is found in the balance sheet.
– Allowance for doubtful accounts: This account represents the estimated amount of money that a company will not be able to collect from its customers who have delinquent accounts. Allowance for doubtful accounts is found in the balance sheet.
– Interest receivable: This account represents the interest that a company has earned but has not yet collected. Interest receivable is found in the balance sheet.

Accounts That Rarely Have a Credit Balance

Accounts payable, accrued expenses, and unearned revenue are the three types of accounts that usually have a credit balance. Accounts payable is when a company owes money to suppliers for goods or services. Accrued expenses is when a company has incurred an expense but has not yet paid for it. Unearned revenue is when a company has received payment for goods or services that have not yet been provided.

Dividends

Dividends tend to be automatically reinvested in the company, so you may not see them as a separate line item on your statement. However, if you hold the stock outside of a retirement account, you will eventually have to pay taxes on the dividends. The IRS classifies dividends as taxable income.

Interest Revenue

Interest revenue is revenue earned by a company when it lends money to another party. The debtor pays periodic interest payments to the creditor, and the creditor records the interest payments as revenue on its interest income statement. Interest revenue is classified as operating revenue if the debtor is an unrelated party; if the debtor is related, the interest income is classified as non-operating revenue.

Companies that earn high levels of interest income typically have large amounts of cash and investments relative to their size. For example, banks and other financial institutions are able to lend out money and earn interest income on those loans.

Gain on Sale of Asset

Gain on the sale of an asset is an accounting term used to describe the increase in value of a company’s assets. The asset could be anything from cash to equipment. The gain is calculated by subtracting the cost of the asset from the proceeds of the sale. If the cost is more than the proceeds, then there is a loss on the sale of the asset.