Dictionary / Compensatory (or compensating) Balance
What does Compensatory (or compensating) Balance mean in accounting?
Quick definition
Cash & bankingThe portion of the balance in the commercial checking account of a borrower (e.g., equal to 20% of a credit line or amount borrowed) which, under an agreement or informal understanding between borrower and bank, may not be withdrawn. This term guides how bookkeepers record, classify, and explain related transactions in routine financial reporting.
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Examples
Twenty percent of the line stays put
You run a cabinet shop. On April 9 your bank approves a $60,000 line of credit and the commitment letter says you must keep 20 percent of the line, $12,000, in commercial checking and may not withdraw it. After a $15,000 draw on April 14, the bank feed and the QuickBooks Online Checking register both show $18,640 as a current asset, but only $6,640 is usable. Do not send an ACH that would drop the account below $12,000.
Leftover loan cash you can spend
You run a mobile dog-grooming route. On September 6 you draw $9,500 from a term note at your bank to buy a used van from a used-car dealer. The note does not require you to leave any of the proceeds in checking. You pay that dealer $8,200 on September 8 and the remaining $1,300 sits in checking. That leftover is ordinary cash you can spend on fuel or supplies. Do not treat it as a compensating balance just because it came from a loan.
Why it matters
A compensating balance is the slice of commercial checking your bank expects you to leave untouched while you have a loan or line of credit. You will not journal this most months; it shows up when the commitment letter, or an informal understanding with the lender, says you must keep a share of the line or the amount borrowed in that account and may not withdraw it. Count the full checking total as spendable and you will send payments that break the agreement, or you will read working capital on the balance sheet as cash you cannot use. A compensating journal entry is only an offsetting bookkeeping fix; it does not lock funds at the bank.
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What is Compensatory (or compensating) Balance in bookkeeping?
The portion of the balance in the commercial checking account of a borrower (e.g., equal to 20% of a credit line or amount borrowed) which, under an agreement or informal understanding between borrower and bank, may not be withdrawn.
When should I use Compensatory (or compensating) Balance?
Use Compensatory (or compensating) Balance when the transaction facts match its definition and you need the ledger and financial statements to reflect the correct account and period.
What is a common mistake with Compensatory (or compensating) Balance?
Compensatory (or compensating) Balance is used for compensatory (or compensating) balance entries, while C&F covers a related but distinct bookkeeping purpose. Review both terms before posting unusual transactions. A common mistake is applying it by label only instead of checking the underlying transaction details.