Letís talk about out-of-balance accounts in accounting

2. Out-of-balance transactions and principles for their accounting

Most out-of-balance transactions may be split into the following two groups:

a) Those requiring no special out-of-balance accounts

In this situation, assets or liabilities are not presented on the balance sheet (for instance, setting up special purpose entities, sale and leaseback, sale of repos to a bank, etc.).

b) Those accounted on the special out-of-balance accounts

Generally, such situations will include:

  • assets under operating lease,
  • assets in custody,
  • guarantees given,
  • guarantees obtained,
  • contract commitments, †
  • factored or written off accounts receivables, and
  • other written off assets.

As noted above, out-of-balance items are not recorded on the balance sheet (or income statement) of a company.† Instead, the company utilizes a simplified (vs. double-entry) system of accounting for such items whereby only one side (debit or credit) of an out-of-balance account is impacted.† It is possible to make such entries outside of the main GL system.

For instance, if Company ABC received $100,000 worth of equipment from a customer for installation at the customerís site, the following entry is made:

Account Titles

Debit

Credit

Dr Assets on Custody: Equipment (out-of-balance)

$100,000

 

     Cr

   

After installation is complete, the following entry is posted:

Account Titles

Debit

Credit

Dr

   

     Cr Assets on Custody: Equipment (out-of-balance)

 

$100,000

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