Credit balance

accounting

The term credit balance consists of the accounting situation in which the sum of items in the 'credit' is greater than those of the 'debit'.

In other words, it happens when more credits are given to the account than charges.

What is it for

When this type of balance occurs it is usually a good sign of cash flow, since accounting credits are synonymous with increases in the total balance of income.

However, if there is an increase in the accounting for 'assets' that translate into credits to accounts related to liabilities or equity, it would mean an increase in real terms. Therefore, the only items that would be reduced would be assets and expenses.

Then, as a compilation, for a credit balance to be given, the following must be given:

  • Greater volume of credits than charges to the account.
  • Higher figure in the credit than in the ‘must’ of the ledger of the accounting account.

The opposite of credit balance is the debit balance. On the other hand, when the balance is neither a creditor nor a debtor, as the value is zero, it is called a neutral balance.

As we can see, the value of the items recorded in the ‘must’ and the ‘have’ coincide and therefore, they are canceled and give a zero result, called at the accounting level ‘neutral’.

T account

Credit balance examples

Next, credit balances in different accounts will be analyzed, with this we will see the impact on each one:

  1. Computer equipment (active). The credit balance in this ledger account reduces the value of this asset.
  2. Bank loan (liability). In this case, the value of this liability account increases as a credit balance occurs.
  3. Reserves (equity). If a credit balance occurs, the value of this accounting account would increase.
  4. Merchandise sales (income). Increase the figure again if the credit limit is given.
  5. Purchase of merchandise (expense). The opposite happens here as with income, the value of this item is diminished.

An exception that we have to highlight is that although a credit and a charge in the accounting accounts mean respectively a decrease and an increase in the asset accounts, the same does not happen in a practical way in the current accounts of the banks.

This happens because the bank or financial institution notifies us as a credit the income in our account and as a charge the expenses that we generate in it. So the bank does not interpret our personal checking account as an asset from our perspective, but as an agora of income and expenses.

Expressions such as ‘Electricity bill charge’ or ‘Rent payment’ are examples.

Income accounts

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