Many businesses choose to keep a credit balance on their accounts to cover any unforeseen expenses. This is perfectly normal, and you shouldn’t be alarmed if you see a credit balance on your business account.
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Accounts That Commonly Have Credit Balances
Accounts that commonly have credit balances include Accounts Receivable, Prepayments, and Equity Accounts.
Accounts receivable is an account that represents money owed to a company by its customers. Accounts receivable is classified as a current asset on the balance sheet because the money is expected to be received within one year.
Common examples of accounts receivable include:
-Bills from customers for goods or services
-Loans from customers
-Investment income that has been earned but not yet received
Service revenues are monies earned by providing a service. Service companies such as lawn care, pest control, and housekeeping provide services to customers and bill them for those services monthly. The service companies expect to receive payment for services provided (i.e., they do not expect a credit balance). Service revenue accounts will have normal balances that are debit balances.
Most businesses have some form of deferred revenue. This is revenue that has been earned, but not yet received. For example, if you sell a service that will be provided next month, you would recognize the revenue this month, but not receive the cash until next month. This would give you a deferred revenue account with a balance of next month’s service fees. Once you provide the service and invoice the customer, the deferred revenue account will be shifted to accounts receivable.
Other common deferred revenue accounts include those for membership fees, subscriptions, and retainer fees. If you have any type of product or service where customers pay in advance, you will likely have a deferred revenue account.
How to Handle Accounts with Credit Balances
Accounts with credit balances can be a bit tricky to handle. On one hand, it’s great that the customer has a credit balance because it means they’ve paid more than they owed. However, on the other hand, it can be difficult to know how to apply the credit balance to future invoices. In this article, we’ll go over everything you need to know about handling accounts with credit balances.
Make a Journal Entry
When an account has a credit balance, it means that the sum of the credit side entries exceeds the sum of the debit side entries. The excess of credits over debits is called the credit balance.
A credit balance may occur in any type of account, but it is most likely to occur in either an asset account or an expense account. In some cases, a credit balance may be desirable. For example, if you want to keep a minimum balance in your checking account, you may deliberately write checks for more than you have in your checking account, knowing that your bank will cover the check and charge you a fee for doing so. The result will be a negative (debit) balance in your checking account and a positive (credit) balance in your bank service charges account.
Write Off the Balance
A credit balance on your business books can occur for a variety of reasons, such as overpayment by a customer, a refundable deposit, or a miscalculation in your Accounts Receivable ledger. Regardless of the reason, you need to take action to remove the credit so your books remain balanced.
There are two ways to handle a credit balance on an account: write it off or apply it to future invoices.
Writing off the balance means classifying the transaction as a bad debt and reporting it on your financial statements accordingly. This course of action should only be taken if you’ve made reasonable attempts to collect the money but have been unsuccessful. You can write off the entire balance or just a portion of it.
If you decide to write off the balance, you first need to create a Bad Debt expense account in your chart of accounts. Then, record a journal entry debiting Bad Debt expense and crediting the Accounts Receivable account for the amount you’re writing off. For example, if you’re writing off $100 from ABC Corp.’s account, your journal entry would look like this:
Bad Debt Expense 100
ABC Corp.’s Account 100
Alternatively, you can apply the credit to future invoices from the customer. To do this, simply make a note in your Accounts Receivable ledger that ABC Corp. has a credit of $100 and apply that amount to future invoices until it’s used up.