Why do some asset accounts have a credit balance?
You usually don’t have a credit balance on asset accounts because by definition that would make them a liability, but there is an asset account specifically designed to carry credit balances. They’re called contra asset accounts. We’ll cover that and the other main reason that asset accounts carry a credit balance: human error.
Contra asset accounts
Each contra asset account serves a different specific purpose, but they are have a couple things in common, too. Contra asset accounts are used to reduce the debit balance of its corresponding asset account in order to calculate a net value for each asset. ZipBooks gives you the option to create a contra asset account automatically for any new or existing asset account that you mark as depreciable.
Here’s a short list of some example contra asset accounts and their corresponding asset accounts.
- Accumulated depreciation -> Fixed Assets
- Bad debt / Allowance for doubtful accounts -> >Accounts receivable
- Reserve for obsolete inventory -> Inventory
Accumulated depreciation has a credit balance because it’s used in combination with its related fixed asset account to calculate the net value of a building, vehicle, piece of equipment, or other fixed asset. With each debit to the depreciation expense account, a corresponding credit is created in the accumulated depreciation account. The fixed asset account tracks the cost.The fixed asset account minus accumulated depreciation is used to calculate the book value.
Bad debt / Allowance for doubtful accounts
The bad debt, or allowance for doubtful accounts has a credit balance to offset the value of accounts receivable. It possible that full payment of some invoices is in doubt. You can use this contra asset account to represent this uncertainty.
Reserve for obsolete inventory
Reserve for obsolete inventoryis a contra asset account that is used to reduce the net value of a company’s balance sheet. With each debited to your expense account related to useless inventory, you’ll create a corresponding credit in the reserve for obsolete inventory asset account.
Contra asset accounts aren’t the only way that asset accounts can carry a credit balance. There’s also good old-fashioned accounting errors.
Bouncing a check
A classic example of human error creating a credit balance on in an asset account is bouncing a check. If you write a check for more than is in your bank account you are going to going to go from a debit balance to a credit balance. You could do that by miscalculating how much money is in your account or putting money into or taking money out of the wrong bank account by accident.
Changes in regularly scheduled bills
If your expenses occur faster than agreed upon prepayments, you could end up with a situation where a prepaid expense account could start carrying a credit balance. This could happen if, for example, you’re having worker’s comp insurance premiums go up after you’ve already made payment due to a workplace accident.
Overzealous asset depreciation
Another example of an accounting error leading to a credit balance on an asset account would be if you continued to depreciate an asset after its value has already gone to zero. It’s ok to have a credit balance in an accumulated depreciation asset account, but the net value of an asset should never go below zero.
So, essentially, all these situations are mistakes that people could make. The only real reason you would want to have asset accounts with a credit balance is if they were intentionally set up as a contra asset account. Before you issue a balance sheet, fix any errors and reclassified any asset accounts with a credit balance as a liability.