Sometimes, businesses can find that they have unusual account balances in their records on accounting. An example of these unusual balances in accounting is what is called a “credit balance”. We have compiled this short guide on a credit balance in accounts receivable. A credit balance in accounts receivable describes an amount that a business owes to a customer. This can occur if a customer has paid you more than the current invoice demands. Credit balances can be located on the right side of a subsidiary ledger account or a general ledger account.
How do I end up with a credit balance in accounts receivable?
A customer overpaying can lead to a credit balance - so can an error in your invoice or an accidental duplicate payment. Another common reason for credit balances in accounts receivable is a discount on goods or services being applied after an invoice is sent to the customer, or when a customer returns goods after paying for them. Some companies also cause these credit balances deliberately, eg if they are experiencing problems with cash flow, they may require a deposit for their goods and services from their customers. In any case, after receiving advance payment, you need to mark it in accounts receivable as a credit balance.
In this example, Company X makes a duplicated payment for your goods. This results in a credit balance of GPB 2,000 which can look like this in your accounting records(eg balance sheet or income statement):
No. - Customer - Balance
1 - Company X - (GPB 2,000)
2 - Company Y - GPB 7,000
3 - Company Z - GPB 1,300
You can see that company X's balance is an account payable, because the amount is owed to the customer, rather than the other way around.
It is also possible for your company to experience debit balances. A debit balance describes an amount that is owed to you by a vendor. This can be caused by a variety of factors, such as having purchased materials from a vendor, but after receiving the materials, found that they were not usable. 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 key for your business to manage the credit balances in accounts receivable - this helps ensure a healthy bank account. If credit balances in accounts receivable are a regular occurrence, there may be issues with how money is being billed in your business. This is why keeping track of credit balances is important. When you have identified an occurrence of inaccurate billing or any other factor leading to a balance, you should see what has led to this, particularly if this happens regularly. We recommend developing in-depth guidelines as an accounts receivable credit balance policy. For example, if your client is not going to use the excess cash in their account, you can create a refund for them. They will be glad to receive their repayment for their (credit card) balance and you can avoid confusion with other credit. Another option is to offer additional services or upgrades to counteract eg a wrongly taken direct debit.