What is a credit balance?
In accounting, a credit balance is the ending amount found on the right side of a general ledger account or subsidiary ledger account.
A credit balance is normal and expected for the following general ledger and subsidiary ledger accounts:
Liability accounts. These include Accounts Payable, Notes Payable, Wages Payable, Interest Payable, Income Taxes Payable, Customer Deposits, Deferred Income Taxes, and so on. For instance, a credit balance in Accounts Payable indicates the amount owed to vendors. (Therefore, a debit balance in a liability account indicates that the company has paid more than the amount owed, has made an incorrect entry, etc.) Since liability accounts are permanent accounts, their balances are not closed at the end of the accounting year.
Equity accounts. Four examples of equity accounts are Common Stock, Paid-in Capital in Excess of Par Value, Retained Earnings, and M. Smith, Capital. These are also permanent accounts and their balances are not closed at the end of the accounting year.
Revenue accounts and gain accounts. Examples include Sales Revenues, Service Revenues, Interest Revenues, Gain on Disposal of Equipment, Gain from Lawsuit, etc. Since these accounts are temporary accounts, their balances will be transferred to Retained Earnings or to the proprietor's capital account at the end of each accounting year.
Contra-asset accounts. Two examples are Allowance for Doubtful Accounts and Accumulated Depreciation. The credit balances in these accounts will allow for the reporting of both the gross and net amounts for accounts receivable and for property, plant and equipment. These are permanent accounts and therefore their balances will not be closed at the end of the accounting year.
Contra-expense accounts. These include Purchases Discounts, Purchases Returns and Allowances, and Expenses Reimbursed by Employees, etc. The credit balances in these accounts allow the company to report both the gross and net amounts. The credit balances in these temporary accounts will be transferred to Retained Earnings or to the proprietor's capital account at the end of the accounting year.