Account Balances

Topics: Bookkeeping, Accounts receivable, Balance sheet Pages: 2 (495 words) Published: May 21, 2013

For many purposes, it is necessary to determine the balance in an account. This is accomplished by adding the debits, credits, and determining the difference between the two sums. An account is said to have a debit balance if the sum of the debit entries to that account exceeds the sum of the credit entries. Conversely, an account has a credit balance if the sum of the credit entries exceeds the sum of the debit entries. Asset accounts normally have debit balances inasmuch as these accounts are increased by debiting. An asset account with a credit balance is no longer an asset. For example, suppose the Accounts Receivable account had a credit balance. This would indicate that the company owed money to its customers, and thus it is properly classified as a liability. Liability and stockholders’ equity accounts normally have credit balances because these accounts are increased by crediting. It is not possible to tell whether an account is an asset or a stockholder’s equity by merely observing its balance. For example, accounts with credit balances may represent deductions from assets rather than stockholders’ equities. Accounts with debit balances may represent deductions from liabilities rather than assets. The fact that total debits were equal to total credits in the illustrations is not due merely to chance or to the contrived nature of the examples. This equality must always exist if the recording process is to be carried out correctly. Whenever the total debits are not equal to total credits, it is certain that an error has been made. Testing the equality of the debit and credit entries serves as a convenient device to detect mistakes.

Although the inequality of debits and credits always signals the presence of an error, the equality of debits and credits does not assure the accuracy of the records. The range of errors that might be disclosed by the equality test is quite broad. However, it discloses neither the omission of an entry nor...
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