5 Ways Accounts Receivable Can Be Negative

5 Ways Accounts Receivable Be Negative | Accounting Smarts
Charles Hall

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Charles Hall

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March 1, 2021

Yes, accounts receivable can have a negative balance, and here are 5 reasons why you may occasionally see a negative balance.

Yes, accounts receivable can have a negative balance, and here are 5 reasons why you may occasionally see a negative balance.

  1. Collected more than you billed
  2. Collected a payment after writing off an accounts receivable
  3. Issued a credit memo larger than the accounts receivable balance
  4. Posted an incorrect journal entry
  5. Recorded a prepayment or deposit incorrectly

None of these reasons are very common, but they will happen from time to time so understanding them, will help you to know what to look for when and if it happens.

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1. Collected more than you billed

Accounts receivables come about as you bill or invoice customers for goods or services rendered.  The amount billed is recorded in accounts receivable under the customers name to keep track of the balance owed.  The entry to record this transaction is to debit accounts receivable and credit sales creating a positive balance in accounts receivable.

  • Accounts receivable $1000
  • Sales $1000

Some point in the future, typically 30 days, the customer will send payment for the invoice to settle the account.  If the customer pays more than the invoice, this would create a negative balance.

For example, let’s consider the customer sends a check for $1200.  This amount is applied to the customers account, resulting in a $200 credit or negative balance for that particular customers account receivable.  The entry to record the payment is:

  • Cash $1200
  • Accounts receivable $1200

If you take both transactions together, you can see that $1000 debit and the $1200 credit to accounts receivables results in a credit or negative balance.

Why the customer would pay more than the invoice amount is left for another discussion, but strange things happen, and you can see why this may not be a common occurrence.

To fix this negative balance you would prepare the following entry.

  • Accounts receivable $200
  • Accrued liability $200

This entry removes the excess $200 from accounts receivable and records the $200 as a liability.  Since the customer overpaid, the business now owes that customer the amount of the overpayment and that should be recorded as a liability.

2. Collected a payment after writing off an accounts receivable

Again, accounts receivable is generated as you sell goods or services.  Accounts receivable is debited and sales is credited for the amount.  So, to continue with our example in number 1 above we have a $1000 accounts receivable balance.

After 90 days of trying to collect the $1000 invoice balance owed by the customer, it appears the amount will not be paid.  So, we remove it from accounts receivable by debiting bad debt expense and crediting accounts receivable.

  • Bad debt expense $1000
  • Accounts receivable $1000

At this point, our accounts receivable is now a zero balance.  But, in six months the customer finally decides to pay the invoice and sends the payment which we record by debiting cash and crediting accounts receivable.

  • Cash $1000
  • Accounts receivable $1000

If you review all the entries, you will see accounts receivable has been debited once to record the invoice, and credited twice, once for writing off the receivable and once for recording payment of the receivable leaving a negative balance.

While we are happy to receive payment, the following entry now needs to be made to fix the negative balance.

  • Accounts receivable $1000
  • Bad debt expense $1000

Essentially this entry reverses the write off of the bad debt expense.

3. Issued a credit memo larger than the accounts receivable balance

Another scenario that may produce a negative accounts receivable balance is related to credit memos.  Let’s continue with the customer with the $1000 invoice.  The $1000 invoice has been recorded and paid for, so the accounts receivable balance is zero.  Later, the customer discovers a minor defect in the product and reaches out for resolution.  You agree to offer them a $100 credit to compensate for the defect.  The customer agrees and you record the following entry unaware the invoice has already been paid.  You debit sales reducing the overall amount sold to $900, and reduce accounts receivable by the same amount.

  • Sales $100
  • Accounts receivable $100

However, since the customer had already paid the invoice account receivable was zero so this entry creates a negative balance of $100.

To fix this negative balance you would prepare the following entry.

  • Accounts receivable $100
  • Accrued liability $100

This entry removes the negative $100 from receivables and records the $100 as a liability since you now owe a refund to the customer.

4. Posted an incorrect journal entry

Of all the scenarios that can cause a negative accounts receivable balance, this might be considered a pure mistake.  Many transactions get posted a month and it is not uncommon to occasionally select the wrong account when posting.

You may post a payment to the wrong customer account.  You may issue a credit for the wrong amount.  Or, you post a general journal entry to accounts receivable by complete mistake.  The scenarios are endless but all potentially produce the same result, a negative accounts receivable balance.

To fix an incorrect journal entry is simple.  Find the journal entry in question and edit it to the correct account.  Or reverse the entry and create a new entry.

5. Record a prepayment or deposit incorrectly

This is an interesting scenario so let’s continue with the original example.  Let’s assume the $1000 was actually a prepayment for goods or services that would be delivered in the future.  Under this assumption, the $1000 is no longer a receivable, rather it is a liability because we have yet to deliver the goods or service.  If recorded as a normal customer payment towards accounts receivable it will create a negative balance because the sale of goods or services has not actually been recorded.

A receivable is created only when a product or service is sold and delivered and invoiced to the customer.  Under this scenario no sale was made, leaving a zero balance in accounts receivable so when the prepayment was made and recorded as a payment to accounts receivable it left the negative balance.

The incorrect entry that would have been made when you received the prepayment would have been which created the negative accounts receivable.

  • Cash $1000
  • Accounts receivable $1000

To fix the negative accounts receivable, the following entry would need to be made to debit accounts receivable clearing out the $1000 and crediting deposit/prepayment liability to reflect what is owed to the customer.

  • Accounts receivable $1000
  • Deposit/prepayment liability $1000

A prepayment is a payment for something not yet delivered and therefore is properly reflected as a liability.  Some companies that produce custom products or offer services over a period of time require a prepayment or deposit upfront before starting the work.  Since the product or service has not been delivered the proper accounting records the deposit/prepayment as a liability.  You can see if recorded as a normal accounts receivable amount a negative balance is created.

We will assume 2 weeks later the product or service is delivered which then requires the following entry.

  • Deposit/prepayment liability $1000
  • Sales $1000

This entry removes the liability from the books and properly recognizes the sale of the goods or service that was delivered.

Charles Hall

Charles Hall

Charles has spent 25 plus years in the world of accounting and business. His experience includes working as a CPA/Auditor international accounting firms. He has worked as a controller and as a COO for small to medium sized companies.

Learn more about Charles Hall