Accounting Question?

Question

A significant amount of credit balances in customer accounts should be shown on the financial statements
as Liabilities, Assets, Owners Equity, Contra Assets or Contra Revenue?

Answer 1

I take the term customer accounts to mean the same as debtor accounts. If this is the case, these a/cs should normally have a debit balance. Credit balances can arise under various circumstances:

1. Wrong posting - the customer has paid once, but the receipt was posted to his credit twice, or wrong amt credited to the customer (he paid $100 but $200 was credited to him) or wrong customer's a/c credited (Customer A paid up but Customer B's a/c was credited). All these human errors would cause the debtor's a/c to end up with a credit balance. Until the credit balances have been properly investigated and corrected, they can remain as a credit in customer's a/cs but they shouldn't remain there for long.

2. The customer over-paid. Yes, it does happen. Due to his carelessness, a customer can pay you twice. If you're honest and as a matter of good business practice, you should refund him the overpayment. Until you do, the overpayment should be recorded as a liability due to him.

3. The customer paid in advance for some goods he ordered but for which you haven't delivered. This should be a liability. At the point when you rec'd the advance, the entry should be:
Dr Cash
Cr Advance from customer (liability a/c)

When you have delivered the goods to him, your entry:
Dr Advance from customer
Cr Sales