What it means
Double-entry bookkeeping records every transaction with equal debits and credits, and each account accumulates both sides; its balance is the difference. The rules of which side increases which type of account are conventions, but they are universal: debits increase assets and expenses and decrease liabilities, equity and revenue; credits do the reverse.
So an account's normal balance is debit for assets and expenses and credit for liabilities, equity and revenue, and the trial balance's debit and credit totals agree because every transaction added equal amounts to each. A credit balance is therefore expected on: trade payables (the company owes suppliers), accrued liabilities, loans and overdrafts, deferred revenue, provisions, share capital, share premium, retained earnings (if the company has accumulated profits), the sales account and other income accounts, and contra-asset accounts such as accumulated depreciation and the allowance for doubtful debts, which sit against assets and reduce them.
A credit balance is unexpected, and worth investigating, on: a customer's receivable account (the customer has paid more than it owes, has been credited twice, has paid an invoice that was later cancelled, or has paid in advance; the balance is a liability to the customer and, if material, should be reclassified as such or refunded); the company's bank account in its ledger (the account is overdrawn, and the balance is a liability); an expense account (a credit note or refund has exceeded the period's charges, or an accrual has been over-reversed); an inventory or fixed asset account (an impossible position that indicates a posting error); retained earnings, if the company has accumulated losses (a debit balance is the expected state then, and a credit balance would be the surprise). Reviewing balances for the wrong sign is a standard control at each period end.
A receivables ledger listing sorted by balance shows the credit balances at the bottom; each is a customer who is owed money or an error to be corrected, and auditors ask for the list. A trial balance with a credit balance on an asset line, or a debit balance on a liability line, is checked before the accounts are prepared.
Accounting software flags accounts whose balance has the abnormal sign. From the customer's side, a credit balance on a supplier statement means the supplier owes the customer (an overpayment, a credit note not yet used); on a bank statement it means funds are in the account (the bank's liability to the customer); on a credit card statement it means the cardholder has paid more than the outstanding charges.
The word means the same in every case, money owed to the holder of the balance by the party that issued the statement, and it is a credit in the issuer's books because it is the issuer's liability. The term also appears in investment accounts: a credit balance in a brokerage account is cash the broker holds for the client, and a margin account's credit balance is what the client has on deposit against borrowing.
In practice
Real-world examples.
Example
A customer's account in a utility's ledger shows a credit balance of $340 after the customer's direct debits exceeded usage, and the utility offers a refund or a reduced payment plan.
Example
A company's overdrawn current account appears in its ledger as a credit balance of $45,000 and in its balance sheet as a bank overdraft liability, not as negative cash.
Example
A retailer's gift card liability account has a credit balance of $2,000,000, representing cards sold and not yet redeemed.
Think of it
“A credit balance means the credit side is larger-normal for what you owe and what you've earned.
Formula
Calculation
Account balance = Total debits minus Total credits (a negative result is a credit balance) or, for accounts presented on the credit side, Total credits minus Total debits
Normal balances: Assets and Expenses = Debit; Liabilities, Equity and Revenue = Credit; Contra accounts = opposite of the account they offset
Trial balance check: Sum of all debit balances = Sum of all credit balances
Worked example. A company's month-end review of balances.
Trial balance extract:
- Cash at bank: debit $84,000 (normal)
- Trade receivables control: debit $412,000 (normal)
- Inventory: debit $290,000 (normal)
- Trade payables control: credit $256,000 (normal)
- Accrued expenses: credit $38,000 (normal)
- Bank loan: credit $150,000 (normal)
- Share capital: credit $100,000 (normal)
- Retained earnings: credit $310,000 (normal: accumulated profits)
- Sales: credit $1,940,000 for the year to date (normal)
- Repairs expense: credit $2,400 (abnormal)
- Second bank account (payroll): credit $6,200 (abnormal)
Investigations:
- Repairs expense credit balance of $2,400: a supplier credit note for $9,000 (a disputed invoice from the previous year, reversed this month) exceeded this month's repair charges of $6,600. The credit note relates to an invoice expensed last year; the correction is right, and the account will return to a debit balance next month. Noted, no action.
- Payroll account credit balance of $6,200: the payroll run was released before the transfer from the main account arrived; the account is overdrawn by $6,200 at the month end. Reclassified as a short-term liability (bank overdraft) in the balance sheet, since a credit balance on a bank account is not negative cash but a borrowing; the transfer cleared it on the first of the next month.
Receivables ledger review: 1,340 customer accounts; 22 with credit balances totalling $17,800. Analysis:
- 9 customers ($8,300): payments received in advance for orders not yet invoiced; reclassified as customer deposits (a liability) in the balance sheet and left on the accounts to be applied on invoicing
- 6 customers ($4,100): duplicate payments; refunds arranged
- 4 customers ($3,600): credit notes issued after the customer had paid the original invoice in full; refunds offered, two customers ask to hold the credit against future orders
- 3 customers ($1,800): unapplied cash allocated to the wrong customer account; corrected by transfer to the right accounts, which were showing overdue balances and had been chased in error
Net effect on the balance sheet: receivables are presented at $412,000 plus $17,800 = $429,800 of debit balances, with $17,800 shown as a liability (customer credits and deposits), rather than netted; the gross presentation is required because the credit balances are amounts owed to different parties from those who owe the debit balances.
From a customer's side: one of the company's own suppliers sends a statement showing a credit balance of $1,250 in the company's favour, arising from a returned delivery credited after the company had paid. The company's payables ledger shows the same supplier with a debit balance of $1,250 (the mirror image). The company deducts it from the next payment.
Trial balance check after corrections: total debit balances $2,646,200; total credit balances $2,646,200. Agreed.Case study
Seen in the real world.
A distributor's receivables ledger carried $210,000 of credit balances across 90 customer accounts, accumulated over several years and never reviewed. The finance manager who eventually analysed them found $60,000 of genuine customer overpayments that were more than two years old (some from customers who had ceased trading), $85,000 of credit notes issued by the sales team for "goodwill" against invoices customers had already paid and not told about, $40,000 of cash misapplied to the wrong accounts (leaving other customers wrongly chased for the same amounts, two of whom had moved their business elsewhere in irritation), and $25,000 of duplicate payments.
The company refunded what it could trace, wrote the untraceable balances to income after taking advice on unclaimed property obligations, corrected the misapplications with apologies, and introduced a monthly credit balance report with a rule that every credit balance over 30 days old is either refunded, applied or explained. The finance manager's note observed that the ledger had been carrying $210,000 that the company either owed to customers or had wrongly withheld from them, and that neither the customers nor the company had known.
Watch out
Common mistakes.
- Netting customer credit balances against other customers' debit balances in the balance sheet, which understates both receivables and liabilities; they are amounts owed to and by different parties.
- Presenting an overdrawn bank account as negative cash rather than as a liability.
- Leaving credit balances on receivable accounts unreviewed, which accumulates customer overpayments the company should refund and hides misapplied cash that leaves other customers wrongly chased.
Questions
People also ask.
Is a credit balance good or bad?
Neither in itself. It is the normal state for liabilities, equity and revenue, and an anomaly to investigate for assets and expenses. On a statement received from another party, it means that party owes you money.
Why does a credit balance on my bank statement mean I have money, while a credit balance on the bank account in my ledger means I am overdrawn?
Because the statement is the bank's record, where your deposit is the bank's liability (a credit in its books), while your ledger records your asset (a debit); a credit balance in your ledger means the asset has become a liability, an overdraft.
What should be done with a credit balance on a customer's account?
Identify its cause, then refund it, apply it to an outstanding or future invoice with the customer's agreement, or correct the posting error that created it. It should not be left indefinitely.
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