Accounting for unusual account balances and offsetting

January 31, 2013

From time to time accounting records may present unusual account balances. For example, a customer may have a credit balance in accounts receivable or a vendor may have a debit balance in accounts payable. This article provides examples of such situations and directions on how to approach them from the accounting standpoint. Offsetting assets and liabilities is also discussed.

1. Example of a debit balance in a liability account

Letís start by looking at an example of a debit balance in a liability account. Letís assume that at month-end an accountant generated an accounts payable listing (e.g., a subledger of a liability account) using the companyís accounting system. The listing shows all vendors and their balances:

#

Vendor

Balance

1

Vendor A

$†††††† 3,200.83

2

Vendor B

15,000.17

3

Vendor C

(4,000.00)

Ö

Ö

Ö

26

Vendor Z

983.75

 

Total accounts payable

$†† 218,590.12

Vendor C has a balance which is opposite in sign compared to other vendor balances. In this instance, because this is an accounts payable listing, all shown vendors have credit balances and Vendor C has a debit balance. In effect, because Vendor Cís account has a debit balance, Vendor Cís balance represents an account receivable.

There may be multiple reasons why Vendor C has a debit balance. For example, the company may have purchased raw materials from Vendor C, paid for the materials, then determined the materials were defective, and returned them to Vendor C. When materials were returned, Vendor C issued a credit memo to the company which the company recorded as a debit balance (e.g., Vendor C needs to refund the purchase amount to the company).

Debit balances in liability accounts should not be confused with contra-liability accounts. Liability accounts are recorded in the liabilities section of the balance sheet. Contra-liability accounts are also recorded in the liabilities section of the balance sheet, but they normally have debit balances and reduce a liability account balance to which the contra-liability account relates. An example of a contra-liability account is a discount on notes payable.

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