Does accounts receivable have a debit or credit balance

Esther Ejim

Last Modified Date: October 17, 2022

Accounts receivable credit balance refers to the outstanding loans that are owed to a company by virtue of granting credit to customers. Most companies, such as retailers and other merchants, often grant their customers different forms of credit in order to expedite the sales process as in the form of layaways to both customers and employees. This is in contrast to the transfer of goods or service in exchange for cash, which is more straightforward in terms of the fact that it offers the business the opportunity to collect its payment up front, without any need to resort to another extra process. The collection of cash by the business also means that it has needed revenue it can use to service the business and to meet its other numerous obligations. An accounts receivable credit balance is the opposite of a debit balance, even though both are included on the balance sheet, since only the debit balance will include overpayments on accounts held by customers.

Most companies cannot operate without the application of some form of accounts receivable credit balance in its balance sheet flowing from the fact that such businesses cannot make any meaningful sales if they do not grant some form of credit to their customers. The process of granting such credit to customers may be through the application of layaways to their accounts, whereby they will only pay a stated incremental amount until the total balance has been paid off. This kind of an accounts receivable credit balance will still be listed in assets and income statements of the company since the sale has already been completed, and it is only left for the customer to pay the agreed balance in the agreed format. The exact mood for the payment of the outstanding balance will be determined by the company's policies regarding such transactions.

Accounts receivable credit balance refers to the outstanding loans that are owed to a company by virtue of granting credit to customers.

Most companies are aware that there is always the risk that some of the people owing such money will default in their repayment of the same. The risk is even more so when the people who owe the money are employees of the company due to the fact that they are not often as motivated as customers to pay off the debt. This consideration causes such companies to list outstanding debts from customs and employees differently under an accounts receivable credit balance.

Every now and then, you may be left with unusual account balances in your accounting records. One of these unusual types of account balances is known as a “credit balance”. But what does a credit balance in accounts receivable (AR) mean? Find out more with our comprehensive guide to AR credit balances.

What does a credit balance in accounts receivable mean?

Essentially, a “credit balance” refers to an amount that a business owes to a customer. It’s when a customer has paid you more than the current invoice stipulates. You can locate credit balances on the right side of a subsidiary ledger account or a general ledger account.

What causes an AR credit balance?

There are many different reasons why you could be left with a credit balance in account receivable. For example, it could be because the customer has overpaid, whether due to an error in your original invoice or because they’ve accidentally duplicated payment. It can also arise when a discount on goods or services is provided after an invoice is initially sent, or when a customer returns goods after already paying their invoice.

Sometimes, an AR credit balance isn’t the result of an error, but a planned move by a company or business entity. For example, if you’re experiencing cash flow problems, you may ask a customer to make a deposit for goods or services to be delivered in the future. After receiving advance payment, you’d need to mark it in accounts receivable as a credit balance.

Example of a credit balance in accounts receivable

To give you a little more insight into AR credit balances, let’s look at a situation where a credit balance in accounts receivable could occur.

Imagine Company A accidentally duplicated payment for a service you provided to them due to an accounting error. This would result in a credit balance of $10,000, appearing in your accounting records like so:

This means that Company A is an account payable, as money is owed to the customer, rather than the other way around.

Can you also have a “debit balance”?

Yes, in addition to credit balances, you may also encounter debit balances. Put simply, a debit balance is an amount that is owed to you by a vendor. There are a broad range of potential causes of debit balances. For example, you may have purchased materials from a vendor, but after receiving the materials, found that they were defective in some way. After returning the materials, the vendor may issue a credit memo, which gets recorded as a debit balance.

Managing your accounts receivable credit balance policy

It’s important to keep track of credit balances in accounts receivable. If you encounter AR credit balances on a regular basis, it may indicate that there’s a pattern of inaccurate billing from your accounting team. Once you’ve identified a credit balance, you need to work out what to do with it. In-depth guidelines should be outlined in your accounts receivable credit balance policy. If your client isn’t going to use the excess cash in their account, you can create a refund for them. You could also get in touch with the payee and offer upgrades or other services to justify the payment.

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