Let’s 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 customer’s 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 |