Due From Account: Definition, How It Works and Vs. Due to Account

What Is a Due From Account?

A due from account is an asset account in the general ledger used to track money owed to a company that is currently being held at another firm. It is typically used in conjunction with a due to account and is sometimes referred to as intercompany receivables.

Understanding a Due From Account

A general ledger stores and organizes data, providing a record of every financial transaction that takes place during the life of an operating company. In it, investors will find credit and debit accounts. The due from account falls into the latter category.

A due from account holds assets in another firm’s account that can be considered as a receivable by the company that owns the due from account. Due from accounts track assets owed to a company and are not used for the tracking of any liabilities or obligations. In the case of many businesses, due from accounts hold deposits made by customers. 

A due from account can have various names, depending on the type of transaction. For example, it can be called intercompany receivables when money for goods or services is received by a subsidiary and is on its way to being forwarded to the parent company.

Nostro Account

In international business, a due from account can be referred to as a nostro account. Nostro, a term derived from the Latin word for "ours," holds deposits made by customers in one country before being transferred to the primary due from account held by the business in their home nation, in their home currency.

Nostro accounts generally hold funds in the currency native to the account's location and not the currency of the business’ home nation or bank. They are frequently used to facilitate foreign exchange and trade transactions.

Due From Account vs. Due to Account

While the due from account tracks money owed to the company, the due to account is used to track obligations, such as funds, that are owed to another entity. The due from accounts focus on incoming assets, also known as receivables, while the due to accounts focus on outgoing assets, also called payables. The funds in a due to account are often designated for a particular purpose, such as to fulfill a debt obligation, prior to being transferred into the account.

At no time should either account ever reflect a negative balance, as these accounts track known obligations. If a negative balance occurs, the most likely culprit is incorrectly entered data. Meanwhile, if the account ever reflects a zero balance, this means there are no receivables or payables expected at that time.

Advantages of a Due From Account

The primary reason for separating the incoming and outgoing funds is for ease of accounting. This keeps all incoming payments focused in one account and outgoing in another. Each transfer can be marked with its source or destination and helps maintain a simplified paper trail if research is required, say in the event of an audit.

The separation of funds is particularly useful when disbursements are scheduled for payments, transfers to other bank locations, or to a company's subsidiaries. The process of separating receivables and payables also helps in tax charges as movement in and out of due from accounts or due to accounts marks when funds were distributed and therefore the appropriate tax charge required on the funds.