At SmartCapitalMind, we're committed to delivering accurate, trustworthy information. Our expert-authored content is rigorously fact-checked and sourced from credible authorities. Discover how we uphold the highest standards in providing you with reliable knowledge.
Accounts receivable credit balance refers to the outstanding loans that are owed to a company by virtue of granting credit to customers. Most companies, such as retailers and other merchants, often grant their customers different forms of credit in order to expedite the sales process as in the form of layaways to both customers and employees. This is in contrast to the transfer of goods or service in exchange for cash, which is more straightforward in terms of the fact that it offers the business the opportunity to collect its payment up front, without any need to resort to another extra process. The collection of cash by the business also means that it has needed revenue it can use to service the business and to meet its other numerous obligations. An accounts receivable credit balance is the opposite of a debit balance, even though both are included on the balance sheet, since only the debit balance will include overpayments on accounts held by customers.
Most companies cannot operate without the application of some form of accounts receivable credit balance in its balance sheet flowing from the fact that such businesses cannot make any meaningful sales if they do not grant some form of credit to their customers. The process of granting such credit to customers may be through the application of layaways to their accounts, whereby they will only pay a stated incremental amount until the total balance has been paid off. This kind of an accounts receivable credit balance will still be listed in assets and income statements of the company since the sale has already been completed, and it is only left for the customer to pay the agreed balance in the agreed format. The exact mood for the payment of the outstanding balance will be determined by the company's policies regarding such transactions.
Most companies are aware that there is always the risk that some of the people owing such money will default in their repayment of the same. The risk is even more so when the people who owe the money are employees of the company due to the fact that they are not often as motivated as customers to pay off the debt. This consideration causes such companies to list outstanding debts from customs and employees differently under an accounts receivable credit balance.