Credit Balance Meaning
A credit balance is an amount attributed to the margin account following the successful completion of the short sale transaction. It normally assists in counterbalancing the prospective future losses of the firm. A credit surges the equity or liability account on the balance sheet, while a debit raises the expense or asset account.
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Credit balance transfer cards aid you in transferring the payable credit card amount to another bank’s credit card for a lesser debt burden. Moreover, the ledger accounts with a credit balance are liabilities, income, contra expense, reserves, capital, and provisions.
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- The credit balance is the full amount credited to the cash account after implementing the short sale order.
- The associated general ledger accounts comprise income, reserves, liabilities, provisions, capital, and contra expense.
- It may be negative or positive and is stated on the right side of the accounting book to counterbalance the debit portions.
- This involves the total outstanding amount on the credit card, positive bank balance, amount payable in the margin account after buying securities, and negative balance in the asset account.
Credit Balance Explained
Credit balance or net balance is the final amount (positive or negative) mentioned to the right of the ledger in accountingLedger in AccountingLedger in accounting records and processes a firm’s financial data, taken from journal entries. This becomes an important financial record for future reference. It is used for creating financial statements. It is also known as the second book of entry.. In the short sale, the investor sells financial securities in the market and then hopes to re-purchase them at a budget price. The brokerage account with short positions possesses a normal credit balance, that can be refunded, while the one with long positions has a debit balance.
That is to say, the net balance involves:
- Entire amount overdue on the credit card
- Positive bank balance
- Amount outstanding in the margin account after buying securities
- A positive balance in the equity, liability, gain, or revenue accountRevenue AccountRevenue accounts are those that report the business's income and thus have credit balances. Revenue from sales, revenue from rental income, revenue from interest income, are it's common examples.
- Negative balance in the asset account
Moreover, the firm may also request for credit balance refund to get back those extra bucks paid more than the originally owed amount. Generally, net balance demonstrates that the sum of money owed to the organization exceeds the amount it owes.
Furthermore, let’s consider the below-mentioned normal credit balance examples.
To clarify, assume that a firm, ABC Corp. maintains a balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company. with routinely updated debit and credit details. As mentioned above, the following facts appear on the credit side.
- Trade payables: $2,00,000
- Share capitalShare CapitalShare capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side.: $2,000,000
- Security premium: $3,000,000
- Capital reserve: $530,000
- Salary payableSalary PayableSalary payable refers to the liability of the company towards its employees against the amount of salary of a period that became due but has not been paid yet to them by the company and it is shown in the balance of the company under the head liability.: $60,000
- Rent payable: $50,000
- Secured loan: $1,100,000
- Unsecured loan: $1,50,000
In short, here is the typical balanced ledger.
|Cash in hand
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The net balance is related to the following accounts in bookkeepingBookkeepingBookkeeping is the day-to-day documentation of a company’s financial transactions. These transactions include purchases, sales, receipts, and payments..
1. Liability Accounts
Please note that these are a group in the account book of a firm exhibiting the amount due. On the debit credit balance sheet, a debit to these accounts means liability cutback while a credit denotes liability increment. It has two major types, i.e., current and non-current liabilities.
They also include bank overdraftOverdraftOverdraft is a banking facility that offers short-term credit to the account holders by allowing them to withdraw money from their savings or current account even if their account balance is or below zero. Its authorized limit differs from customer to customer., short-term loansShort-Term LoansShort-term loans are defined as borrowings undertaken for a short period to meet immediate monetary requirements., debenturesDebenturesDebentures refer to long-term debt instruments issued by a government or corporation to meet its financial requirements. In return, investors are compensated with an interest income for being a creditor to the issuer., secured loansSecured LoansSecured loans refer to the type of loans approved and received against a guarantee or collateral. If they fail to do so, the lending institution acquires the collateral to compensate for the amount that the borrowers were allowed., call and put optionsPut OptionsPut Option is a financial instrument that gives the buyer the right to sell the option anytime before the date of contract expiration at a pre-specified price called strike price. It protects the underlying asset from any downfall of the underlying asset anticipated., deferred tax liabilitiesDeferred Tax LiabilitiesDeferred tax liabilities arise to the company due to the timing difference between the accrual of the tax and the date when the company pays the taxes to the tax authorities. This is because taxes get due in one accounting period but are not paid in that period., unsecured loansUnsecured LoansAn unsecured loan is a loan extended without the need for any collateral. It is supported by a borrower’s strong creditworthiness and economic stability, and swaps in financeSwaps In FinanceSwaps in finance involve a contract between two or more parties that involves exchanging cash flows based on a predetermined notional principal amount, including interest rate swaps, the exchange of floating rate interest with a fixed rate of interest..
It is a fraction of the available profit set aside for a particular reason, like dispersion to shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares. in case of liquidationLiquidationLiquidation is the process of winding up a business or a segment of the business by selling off its assets. The amount realized by this is used to pay off the creditors and all other liabilities of the business in a specific order. or business development. Furthermore, reserves or general reserveGeneral ReserveGeneral reserve is the amount kept aside from the profit earned by the company during its normal course of the operation to meet future needs like contingencies, strengthening the company’s financial position, increasing working capital, paying dividends, offsetting specific future losses. are of two kinds, namely, revenue reserves and capital reservesCapital ReserveCapital reserve is a reserve that is formed from the company's profits earned from its non-operating activities during a period of time and is retained for the purpose of financing the company's long-term projects or writing off its capital expenses in the future..
For example, reserve for dividends equalization, expansion, increased replacement expenses, shares premiumShares PremiumShare premium is the difference between the issue price and the par value of the stock and is also known as securities premium. The shares are said to be issued at a premium when the issue price of the share is greater than its face value or par value. This premium is then credited to the share premium account of the company., etc.
3. Capital Account
A capital accountCapital AccountThe capital account refers to the general ledger that records the transactions related to owners funds, i.e. their contributions earnings earned by the business till date after reduction of any distributions such as dividends. It is reported in the balance sheet under the equity side as “shareholders’ equity.” is the documentation of the funding amount and income from the company, incorporating minority interestMinority InterestMinority interest is the investors' stakeholding that is less than 50% of the existing shares or the voting rights in the company. The minority shareholders do not have control over the company through their voting rights, thereby having a meagre role in the corporate decision-making. accounts. That is to say, the capital account tracks retained earningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company. throughout one accounting periodAccounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance. to another.
Please note that it has two chief subaccounts on the debit credit balance sheet, namely capital transfer and acquisition and disposal of non-produced, non-financial assets. Moreover, the examples encompass partnerships and LLCs, sole proprietorships, and shareholders.
Please note that it represents the capital allocated by the business to offset predictable future losses or expenditures. This assists in computing the gross taxable incomeTaxable IncomeThe taxable income formula calculates the total income taxable under the income tax. It differs based on whether you are calculating the taxable income for an individual or a business corporation. of the enterprise. For example, asset impairments, accruals, depreciation, bad debts, guarantees, provision for income tax, etc.
5. Contra Expense Account
A contra expense account is an account in the ledger that counterbalances another particular expense account and sustains the matching principle of accountingMatching Principle Of AccountingThe Matching Principle of Accounting provides accounting guidance, stating that all expenses should be recognized in the income statement of the period in which the revenue related to that expense is earned. This means that, regardless of when the actual transaction is made, the expenses that are entered into the debit side of the accounts should have a corresponding credit entry in the same period.. Its examples include purchase allowances, purchase returns, and purchase discounts for the business transactionBusiness TransactionA business transaction is the exchange of goods or services for cash with third parties (such as customers, vendors, etc.). The goods involved have monetary and tangible economic value, which may be recorded and presented in the company's financial statements..
It comprises the revenue and gain accounts certainly implicating the business’s cash from its operating and non-operating ventures. For instance, asset sales, the dividend declaredDividend DeclaredDividend declared is that portion of profits earned that the company’s board of directors decides to pay off as dividends to the shareholders of such company in return to the investment done by the shareholders through the purchase of the company’s securities., consulting services, and interest incomeInterest IncomeInterest Income is the amount of revenue generated by interest-yielding investments like certificates of deposit, savings accounts, or other investments & it is reported in the Company’s income statement. .Dividend declared is that portion of profits earned that the company’s board of directors decides to pay off as dividends to the shareholders of such company in return to the investment done by the shareholders through the purchase of the company’s securities.
Frequently Asked Questions (FAQs)
The financial organization issues a balance transfer credit card permitting the customers for the overdue balance transfer process to another bank’s credit card. In addition, it aids in diminishing the tax burden by offering low-interest rates on monthly installments.
Credit cardholders can check their balance (maybe refunded) through the following methods:
1. Internet Banking
2. Monthly credit card statement
3. Contacting customer care
4. Mobile app
5. ATM, or
The customers may also request for credit balance refund through offline or online portals.
Statement balance on a credit card certainly depicts total payments and expenditures made to the account throughout one complete billing cycle. Therefore, paying up lesser than their statement balance will put the account in good standing, though they will incur interest rates. Meanwhile, the customers must prioritize the payment of their statement balance over the current balance.
This has been a guide to Credit Balance and its Meaning. Here we explain normal credit balance ledger accounts, balance transfer cards, & the refund process. You can learn more about accounting from the following articles –