What is Debit Balance?
A debit balance is the amount of money an investor owes on a margin loan. It is calculated as the amount the investor directly owes his/her broker. It does not account for the paper profit the investor has made on various transactions. When determining the amount owed in the case of a margin call. The adjusted balance is typically used. Which starts with the balance and subtracts the amount of applicable paper profit.
It occurs in a situation where an investor purchases securities on margin. Or borrows money from the account by using securities as collateral. Brokerage firms mostly charge an interest rate on the borrowed funds. This varies with the size of the balance.
Often found in the assets and expenses ledgers, and here are a few examples:
Fixed assets A/c’s
- firstly, When a fixed asset is bought, it is kept as a debit exchange, and later credit entries are made for charging run down of the asset. It leaves a net balance in the fixed asset account.
- Secondly, is Expense and loss accounts like rent, salary, repair, interest expense, electricity, etc., always carry a balance.
- Thirdly, investment purchased will have a debit entry, and later, the balance will be seen in the investment account.
Debit vs. Credit Balance
Furthermore, Two types of balances are found in the general ledger. In order to find out what balance a ledger reflects, you will have to check which side of the ledger has a higher balance, (i.e.) if the debit total is greater than the credit, then the ledger has a debit balance. However, if the credit total is higher than the debit total, then it will have a credit balance.
It is represented thus:
- If Debit Total > Credit Total = Debit Balance and
- If Credit Total >Debit Total = Credit Balance.
Adjusted Debit Balance
A margin account may consist of both long and short margin positions. This is an amount in a margin account that is owed to the brokerage firm, excluding profits on short sales and balances in a special memorandum account (SMA).
In a margin account, the brokerage customer is able to borrow funds from the brokerage firm, in order to buy securities and pledge cash or securities already in the margin account as collateral. The adjusted balance intimates the investor on how much would be owed to the broker in the event of a margin call, which needs to pay the borrowed funds to the brokerage firm.