Accounting for unusual account balances and offsetting

4. Offsetting assets and liabilities

In some instances the same counterparty (e.g., customer, vendor) may have debit and credit balances in accounting ledgers. For example, Customer ABC may have an account receivable balance of $20,000. The company may also make a one-time purchase of maintenance services from Customer ABC in the amount of $15,000. When the company makes this one-time purchase, the following entry is recorded:

Account Titles

Debit

Credit

Maintenance Expense

$15,000

 

      Accounts Payable

 

$15,000

Instead of paying Customer ABC for the purchased services, can the company offset the amount against the account receivable balance due from the customer? According to US GAAP, the answer is positive if all of the following conditions are met:

Condition

Explanation

Each of two parties (e.g., the company and the customer) owes the other determinable amounts.

The customer owes the company $20,000 and the company owes the customer $15,000, so the amounts are determinable.

The company has the right to set off the amount owed with the amount owed by the other party.

The company should agree with the customer that the company will offset the $15,000 it owes to the customer with the amount that the customer owes to the company.

The company intends to set off.

The company should have plans to actually perform the set off.

The right of setoff is enforceable by law.

Such right to setoff is enforceable according to the law.

If all conditions are satisfied, the company can post the following entry to offset the account payable with the account receivable:

Account Titles

Debit

Credit

Accounts Payable

$15,000

 

      Accounts Receivable

 

$15,000

After this setoff, the customer will still owe the company $5,000 (e.g., $20,000 - $15,000).

If the conditions are not satisfied, the company will have to pay the $15,000 to the customer and collect $20,000 from the customer, and no offsetting will be performed.

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