What Is Dangling Debit?
A dangling debit is a debit balance with no offsetting credit balance that would allow it to be written off. It occurs in financial accounting and reflects discrepancies in a company's balance sheet, and when a company purchases goodwill or services to create a debit.
When adding the journal entry to financial statements, a corresponding credit balance is not reported and cannot be written off. Dangling debit can be received when a company is acquired but is not recorded on the balance sheet.
- A dangling debit is a debit balance with no offsetting credit balance that would allow it to be written off.
- A dangling debit arises when a company purchases goodwill or services that create a debit or that reflects discrepancies in a company's balance sheet.
- When a company uses dangling debit in its financial statements, it is listed either as negative reserves or as deductions against the shareholders' equity of the firm.
- Sometimes dangling debit can be seen as a red flag to accountants conducting an audit, as it can indicate fraud.
- A debit balance is not the same as a dangling debit, although the terminology is related.
Understanding Dangling Debit
Standard accounting practices call for all debits and credits to equal each other when being recorded in a company's journal. For example, if your business made a credit card sale of $100, you would credit your sales account and debit your accounts receivable account for $100, each.
A dangling debit arises when a company purchases goodwill. Because of this, the company will receive a debit entry on its financial statements, but no entry is entered on the credit side and therefore a dangling debit is created.
When a company uses dangling debit in its financial statements, it is listed either as negative reserves or as deductions against the shareholders' equity of the firm.
Sometimes a dangling debit can be seen as a red flag to accountants conducting an audit, as it can indicate a company trying to hide or distract investors from financial actions taken during the time period documented.
Many frauds involve the improper recognition of assets or a "dangling debit." However, a dangling debit does not, in general, equate to fraudulent activity and can instead be a reflection of discrepancies or incorrectly recorded items on the balance sheet.
The term uses the word "dangling" because credit balances and debit balances must equal each other in a company's journal entries. When goodwill is purchased and recorded as a debit, there is no corresponding recorded credit, hence the "dangling" of the debit entry.
Dangling debit should not be confused with a debit balance, which can refer to the amount that an investor owes a broker. This generally reflects a debt that has resulted from the purchase of securities on a margin basis; as a result, the investor is charged interest. Whatever amount is owed, which is listed on the margin account, determines the debit balance.
Debit Balance vs. Dangling Debit
A debit balance is not the same as a dangling debit, although the terminology is related. Assets and expenses have natural debit balances; positive values are debited and negative balances are credited. A company that has received $1,000 in cash would show a debit of $1,000 to the cash account on the balance sheet, due to increasing cash. If another transaction involved the company paying $500 in cash, the balance sheet would show a credit to the cash account of $500, because cash is being reduced.
When an investor has incurred a debit balance, it must be repaid to the broker. The brokerage determines the terms and conditions for the repayment of a debit balance, in accordance with laws and regulations in a particular country or state. The terms may be correlated to an investor's credit rating: investors with better credit will be given more lenient terms than those with worse credit.
A company's credit balance reflects the amount of money it owes a client on their account, from an investment company or bank. Such a balance can be the result of returns in investment, a refund that a client is entitled to, or an overpayment.