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Why will some asset accounts have a credit balance?

A few asset accounts intentionally have credit balances. For instance, the account Accumulated Depreciation (which is a plant asset account) will have a credit balance since it is credited for the amounts that are debited to Depreciation Expense. The account Allowance for Bad Debts will have a credit balance for the amounts in Accounts Receivable that are not likely to be collected. The accounts Accumulated Depreciation and Allowance for Bad Debts are referred to as contra asset accounts because their credit balances are contrary to the expected debit balances found in most asset accounts.

There are also unexpected situations that result in asset accounts having credit balances. Here are five examples:

  1. An error caused by posting an amount to an incorrect account.
  2. Continuing to depreciate or amortize an asset after its balance has reached zero.
  3. Receiving and posting an amount that was greater than the recorded receivable.
  4. Expenses occurred faster than the agreed upon prepayments.
  5. The amount of checks written exceeded the positive amount in the Cash account.

Before issuing the balance sheet, any errors (such as items 1 and 2) need to be corrected. The accounts with credit balances in items 3, 4, and 5 need to be reclassified to the liability section of the balance sheet.