A credit balance of $917 brought down on Y Ltd’s account in the books of X Ltd means that:
(A) X Ltd owes Y Ltd $917.
(B) Y Ltd owes X Ltd $917.
(C) X Ltd has paid Y Ltd $917.
(D) X Ltd is owed $917 by Y Ltd.
The correct answer and explanation is :
The correct answer is:
(A) X Ltd owes Y Ltd $917.
Explanation:
In accounting, a credit balance in a company’s books for a specific account generally represents a liability (amount payable) or revenue. Conversely, a debit balance typically represents an asset or an expense.
In this case, Y Ltd’s account has a credit balance of $917 in X Ltd’s books. This means that X Ltd has recorded an amount payable to Y Ltd. A credit entry in an account payable indicates that the company (X Ltd) owes money to a creditor (Y Ltd). The phrase “brought down” means that this balance has been carried forward from the previous accounting period, confirming an ongoing liability.
Let’s analyze the options:
- (A) X Ltd owes Y Ltd $917. ✅ Correct. A credit balance in Y Ltd’s account means X Ltd has an obligation to pay Y Ltd.
- (B) Y Ltd owes X Ltd $917. ❌ Incorrect. A credit balance suggests that X Ltd is the debtor, not Y Ltd.
- (C) X Ltd has paid Y Ltd $917. ❌ Incorrect. If X Ltd had paid, the balance would have been reduced or eliminated.
- (D) X Ltd is owed $917 by Y Ltd. ❌ Incorrect. If Y Ltd owed X Ltd, the account would have had a debit balance instead.
Practical Example:
If Y Ltd supplies goods to X Ltd on credit, X Ltd will record it as an account payable (credit entry). Until X Ltd settles the amount, Y Ltd’s account will continue to show a credit balance in X Ltd’s books.