What it means
Every account in the ledger ends a period with either a debit balance or a credit balance. Liabilities such as loans and accounts payable, equity such as share capital and retained earnings, and income accounts normally carry credit balances, so a credit balance there is exactly what you would expect.
The unusual cases are accounts that normally carry a debit balance, such as cash, receivables, inventory and expenses. If a customer account in receivables shows a credit balance, the customer has paid more than it was invoiced for, or a credit note has been issued after payment, and the business actually owes the customer money.
A credit balance in receivables should be investigated, not ignored. It may be a genuine overpayment that needs refunding, a payment applied to the wrong account, or a duplicate receipt.
On the balance sheet, such credit balances are often shown as a liability in their own right, not netted against other customers' receivables, so that neither figure is misstated. In personal finance, a credit balance on a credit card arises when a cardholder overpays the statement or receives a refund after paying.
The issuer holds this money for the customer and may refund it on request or use it against future purchases. Credit balances also appear in a bank context.
A bank account with a credit balance is one where the customer has money on deposit, and the bank, in its own books, treats that as a liability because it owes the money to the customer. Finance teams review credit balances in receivables regularly.
Unclaimed balances can raise legal issues in some places, because rules on unclaimed property can require businesses to hand over old amounts to the authorities after a set period.
In practice
Real-world examples
Example 1
A building supplies firm receives a payment of $9,600 from a contractor for an invoice of $8,900. The $700 difference sits as a credit balance on the contractor's account until the accounts team refunds it or applies it to the next order. The credit controller writes to the contractor to ask which option is preferred.
Example 2
A retailer pays a $4,000 credit card bill and then returns goods worth $500 that were bought on the card. The card account moves to a credit balance of $500, which the issuer will pay out on request. Until it does, the balance reduces the amount the retailer owes on any new purchases.
Example 3
During the month-end review, an accountant finds a supplier account in payables with a debit balance of $1,200, meaning the business has overpaid. She contacts the supplier to arrange a refund or credit against the next bill.
Think of it
A credit balance means the credit side is larger-normal for what you owe and what you've earned.
Formula
Calculation
Credit balance = total credits - total debits (when credits are larger)
A customer account shows invoices of $18,000, recorded as debits. The customer pays $20,500, recorded as a credit. Total debits are $18,000 and total credits are $20,500, so the account has a credit balance of $20,500 - $18,000 = $2,500. The supplier owes the customer $2,500, and should refund it or use it against the next invoice, with the customer's agreement.Case study
Seen in the real world
Heronsgate Furniture is an illustrative, fictional retailer that had a receivables balance of $850,000 on its balance sheet. During an audit, the accountant noticed that 46 customer accounts had credit balances that together came to $63,000.
The credit balances had been hidden because the report netted them against the other accounts, so the receivables looked smaller than they were and the company's liabilities were understated. About $41,000 was due to payments applied to the wrong customer and the rest to genuine overpayments.
The team corrected the postings, refunded the genuine overpayments and changed the report to show credit balances separately. In this illustrative case, the clean-up improved the accuracy of the accounts and avoided awkward questions from the auditor.
Watch out
Common mistakes
- Assuming a credit balance is always good news, when on a customer or asset account it may signal an error or money owed.
- Netting credit balances against other customers' debit balances, which understates both receivables and liabilities.
- Leaving old credit balances unresolved, which can create legal and reputational problems, particularly where unclaimed money rules apply.
Questions
People also ask
Is a credit balance on a bank account good?
Yes for the customer, because it means there is money in the account, though the bank records it as something it owes.
Can a credit balance on a credit card be withdrawn?
Usually yes, because most issuers will refund it on request, and many will do so automatically after a period of time. Check your card agreement for the exact process.
Where does a credit balance appear on the balance sheet?
Credit balances normally sit in liabilities, equity or income, and an unusual credit balance in a debit account is generally shown as a liability. The income statement picks up the income and expense accounts.
Watch