Dangling Debit

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.

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.