Passive Exchange

A so-called ” passive swap ” is an accounting process in which two passive positions are involved, but no active position. In this article, we have summarized what you have to pay attention to with a passive exchange, what examples there are and how a passive exchange works.

Passive Exchange – Definition

The passive swap involves two passive positions . The posting reduces one of the two items and the other item is increased by the same amount. The logical consequence is that the balance sheet total remains unchanged despite this posting, since the entire process only affects the two liability items.

What is a passive exchange?

We will now go through step by step how exactly a passive exchange can look like and which bookings are necessary.

Exchange of liabilities as part of accounting and accounting

The balance sheet changes with all postings, as is the case with a liability swap. Apart from the passive exchange, the following events can also occur:

  • Active exchange
  • Active-passive increase
  • Active-passive reduction

Of course, every passive exchange must also be booked in the normal way. On the one hand, there is the posting of the passive exchange and, on the other hand, the associated change in the balance sheet according to the posting.

What happens with a passive swap?

When exchanging passive, only positions on the passive side are changed. This means that a posting is made that only affects the liabilities side of the balance sheet. As a result of this change, the balance sheet total remains unchanged and the assets side also has nothing to do with the entire process.

Booking record – passive exchange

Which booking rate is used exactly depends on which incident is actually booked. It is relevant that both positions of the posting record are exclusively passive accounts . For example, a liability (found on the liabilities side of the balance sheet) can be converted into a long-term loan (also found on the liabilities side of the balance sheet). The booking of this change is then a passive exchange. Next, we’ll explain how the example would actually work.

Example – passive swap

A classic example of a liability swap is the conversion of an existing debt to a supplier into a long-term loan . Let’s imagine a company has received goods and has not yet paid for them. There is therefore an open claim from the supplier to the company or, from the company’s perspective, there is a liability.

Now business is going badly and the company is asking the supplier for more time to pay the bill. The long-term supplier wants to help in this situation and the short-term liability is converted into a longer-term loan. From the supplier’s point of view, this process also makes sense. If he insisted on his claim, the company might have to file for bankruptcy. This means that there is a high risk that only a fraction of the amount will be paid. Thus, the supplier prefers to wait longer for payment and agrees to the conversion.

This leads to a shift in accounting. Short-term liabilities decrease, the position of loans increases. The movement takes place exclusively within the liabilities side, the balance sheet total and the assets side remain completely unchanged.

Differences between active and passive swaps

As the name suggests, an asset swap and a liability swap only change positions on the respective side of the balance sheet. This means that the entire booking always only contains accounts that are located on only one of the two sides. Active and passive swaps also have in common that there is no change in the balance sheet total.

An example of an active swap would be when a new computer is purchased and paid for by bank transfer. Correspondingly, the fixed assets increase by the value of the computer, while the booking account of the bank is reduced by the same amount.

Active and passive increase

An active and passive increase sounds a bit more special at first, but is one of the most normal bookings in the world. For example, imagine that a new system is being purchased. The fixed assets increase accordingly. However, the invoice is not paid immediately, the payment term is used in full. This creates a liability that can be found on the liabilities side.

This means that the active side and also the passive side increase. The balance sheet total is higher than before, which is why there is talk of an increase in assets and liabilities.

Active and passive reduction

The reverse reduction in assets and liabilities works exactly the same as the increase on both sides just described. The only difference is that this time the balance sheet total is not increased, but decreased.

Conclusion

A passive exchange occurs regularly in practically all companies. It is important to understand the process and to make the bookings correctly as always. Since only the liabilities side is affected and the amounts of the two changed items must always be identical, the balance sheet total remains unaffected by the liability swap. Overall, the passive exchange is a very simple booking without any special features that should not cause you any problems.

In addition to the passive swap, there is also the active swap, which works just like a passive swap, only on the active side of the balance sheet. Apart from these two options, in which the balance sheet total remains the same, there are also the options of increasing assets and liabilities and reducing assets and liabilities. The balance sheet total changes up or down, as the assets and liabilities sides both decrease or increase.

Passive Exchange