What is a Credit Balance?

//What is a Credit Balance?
What is a Credit Balance? 2017-10-02T07:54:39+00:00

Definition: A credit balance is the amount of money credited to a margin account after a short sale transaction is successfully completed. In other words, it’s is the sum of all the funds generated by the execution of a short sale.

What Does Credit Balance Mean?

What is the definition of credit balance? In the securities’ industry, credit balance is a term used for margin accounts. A margin account is a brokerage account that allows the client to leverage his funds through a collateralized loan. The collateral, in such cases, will be all securities and funds available on the account.

The CB refers to the amount of money received after a short sale is made. In a regular short sale, the client borrows securities from his broker and sells them in the open market with the expectation of buying them back cheaper for a profit. The proceeds from the sale are credited on his account and this constitutes the balance. The CB includes both the maintenance margin and the free funds available for dealing.

Let’s take a look at an example.

Example

Mr. Murray owns a margin account in High Profit Dealers LLC, a brokerage company. Mr. Murray decided to short sale 100 shares of FF Petroleum INC at the current market price, which is $3 a share. The transaction was successfully executed by Mr. Murray’s stockbroker and resulted in $2,995 (a $5 commission was charged for the transaction) being deposited in Mr. Murray’s account. Of those funds, there’s a maintenance margin of $750 and $2,245 of free available funds.

What will be the balance in this situation?

As we previously discussed, the credit balance is the amount of money received after a short sale is successfully executed. This includes both the maintenance margin and any free available funds. According to this definition, the current CB of Mr. Murray should be 2,995.

Summary Definition

Define Credit Balance: Credit balance, in accounting, means a ledger account that totals on the right side of the t-account.