Should there be negative cash on the balance sheet?

Having an excessive amount of funds tied up in stock will strangle your cash flow and reduce your ability to meet financial obligations as they fall due. A negative cash balance in the general ledger does not mean that the company’s bank account is overdrawn. Let’s assume that a company writes checks for $100,000 and mails them at the end of the day to suppliers in another state. Those checks might not clear the company’s bank account until three or four days later. Therefore, it is possible that the company’s Cash account shows a negative $40,000 but at the bank the company’s checking account balance could have a positive balance of $60,000.

  • If this is the case, net assets can and should be reported as a negative number on the balance sheet.
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  • A person who has negative equity is said to have a negative net worth, which essentially means that the person’s liabilities exceed the assets he owns.
  • This happens when the business has issued checks for more funds than it has on hand.
  • If short-term issues cause a negative cash balance, it makes sense to secure enough financing to weather the shortfall.

The concept of negative equity arises when the value of an asset (which was financed using debt) falls below the amount of the loan/mortgage that is owed to the bank in exchange for the asset. It normally occurs when the value of the asset depreciates rapidly over the period of use, resulting in negative equity for the borrower. There are account balances in Balance Sheet report that should always show as negative amounts, such as accumulated depreciation or distributions. This is because these accounts are showing reductions to the accounts they off-set.

Financial Statement

If the negative balance is due to an overdraft, it is labeled as a bank overdraft. In this case, the bank overdraft accounting treatment will be to include it as an Accounts Payable journal entry, with a coinciding increase to the total cash entry to balance. However, in some cases, a “negative cash” line item might appear on a company’s balance sheet due to an accounting error or misinterpretation.

  • Then, use the ledger to calculate the ending balance and update your balance sheet.
  • Net assets, or equity, represents the value of business assets if all liabilities are paid off.
  • Make sure you’re not paying too much for the products and services you need to run your business.
  • A negative net income means a company has a loss, and not a profit, over a given accounting period.

Net assets, or equity, represents the value of business assets if all liabilities are paid off. High net assets on a balance sheet indicates a healthy, viable business. Low net assets means that the company doesn’t have much cash and property relative to what it owes.

Accounting Terms: W

Combined financial losses in subsequent periods following large dividend payments can also lead to a negative balance. A company cannot have negative cash on a balance sheet because cash is a physical asset that a company either possesses or does not possess. If cash outflows (payments) exceed cash inflows (receipts), the cash account can indeed be depleted to zero, but not below zero. If a company needs to make further payments beyond its available cash, it will have to draw on other resources such as borrowing (which would increase its liabilities), issuing equity, or selling assets. A negative balance is an indicator that an incorrect accounting transaction may have been entered into an account, and should be investigated. Usually, it either means that the debits and credits were accidentally reversed, or that the wrong account was used as part of a journal entry.

fixed assets

For instance, if a company’s bank account is overdrawn, this is technically a liability (since the company owes the bank money), and should be recorded as such. Some companies have multiple bank accounts with multiple banking institutions. In such cases, the net balance of one bank might be positive and the net balance of the second bank might be negative. Then the company would reflect the positive balance as cash and the negative cash balance (of the second bank) as an overdraft. A strong balance sheet will employ a balanced mix of debt and equity funding to maximize the return on capital employed.


Negative shareholders’ equity is a warning sign that a business could be facing financial distress. A company might have taken on too much debt or could be otherwise overspending. Though companies with negative equity can eventually succeed and grow, investors should closely examine them before investing to understand how they wound up with negative equity, as well as their path forward. Hopefully these two bank options illustrate why accountants will report a negative cash balance as a liability. So, while it may feel like the company has “negative cash,” this situation is instead reflected as an increase in liabilities.

Negative Equity – Implications

Certain types of vendors may be willing to give you a longer amount of time to pay invoices. Or, see if the vendor will give you a payment plan and split the balance due into smaller amounts. For the last thirty-five years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention, The Why and How of Auditing, Audit Risk Assessment Made Easy, and Preparation of Financial Statements & Compilation Engagements. Charles consults with other CPA firms, assisting them with auditing and accounting issues. If checks are created but not released by year-end, reverse the payment.

Owner equity

Therefore, cash will have a zero balance and the overdrawn checks account will have a $100 credit balance. Debits increase asset or expense accounts and decrease liability or equity. Credits do the opposite — decrease real estate accounting made easy assets and expenses and increase liability and equity. On the flip side, if accounts payable were also to increase, it means a firm is able to pay its suppliers more slowly, which is a positive for cash flow.

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