Debit balance definition
/What is a Debit Balance?
There are several meanings for the term debit balance that relate to accounting, bank accounts, lending, and investing. They are noted below.
Debit Balance in Accounting
A debit balance is an account balance where there is a positive balance in the left side of the account. Accounts that normally have a debit balance include assets, expenses, and losses. Examples of these accounts are the cash, accounts receivable, prepaid expenses, fixed assets (asset) account, wages (expense) and loss on sale of assets (loss) account. Contra accounts that normally have debit balances include the contra liability, contra equity, and contra revenue accounts. An example of these accounts is the treasury stock (contra equity) account.
Other accounts have a natural credit balance. These accounts are contained within the liability and equity sections of the balance sheet, and the revenue section of the income statement. It would be quite unusual for any of these accounts to have a debit balance.
Debit Balance in a Bank Account
A debit balance is a negative cash balance in a checking account with a bank. Such an account is said to be overdrawn, and so is not actually allowed to have a negative balance - the bank simply refuses to honor any checks presented against the account that would cause it to have a debit balance. Alternatively, the bank will increase the account balance to zero via an overdraft arrangement. Overdraft fees can be substantial, so account holders need to be aware of their remaining account balances before issuing checks.
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Debit Balance in Lending
A debit balance is the remaining principal amount of debt owed to a lender by the borrower. If the borrower is repaying the debt with regular installment payments, then the debit balance should gradually decline over time. If the borrower is paying down the balance at an accelerated rate, this will result in a substantial decline in the total amount of interest paid. However, if the borrower rolls over the debt into a new debt instrument as of the maturity date of the old loan, then the debit balance is more likely to remain about the same over time.
Debit Balance in Investing
In investing, a debit balance refers to the amount of money an investor owes to a broker, typically as a result of buying securities on margin. When an investor borrows funds from a brokerage to purchase stocks, the borrowed portion creates a debit balance in their margin account. This balance accrues interest and must be repaid, usually from the proceeds of selling securities or by depositing additional funds. If the value of the investor's portfolio falls below a certain level, the broker may issue a margin call, requiring more collateral. Maintaining a debit balance involves risk, as losses can exceed the original investment.