Negative Liability on Balance Sheet

Updated: Feb 25


Negative Liability.

A Balance Sheet gives you a financial snapshot of the company as of the specific date. It calculates how much the company worth (its equity) by subtracting all money it owes (Liability) from the money it owns (Asset). Balance Sheet complies the accounting equation:

ASSET = EQUITY + LIABILITY

Liability is an obligation toward another party to pay money, deliver goods and render service. In this blog, we discuss 2 common situations of Negative Liability.

Irvine Bookkeeping

1. ACCOUNTS PAYABLE is NEGATIVE.

Accounts Payable is a current liability that is used to ensure that you will not miss any opening bill. Every time we create a bill, QuickBooks records a credit with the bill amount. When we pay bills, QuickBooks records a Debit with the payment amount. Therefore, 2 figures should be matched. If the amount is POSITIVE, we still owe the vendor. But, why do we have the negative amount here? Maybe the company overpaid Vendors.

Let’s analyze this situation:

  • On 05/01/2020, we create a bill that equals $300 for Merrill Communication. When recording the vendor’s bill, the Accounts Payable increased $300.

  • On 05/25/2020, we paid that bill. Unfortunately, we paid with the amount of $334.71, the exceed = $6.00 makes the Accounts Payable NEGATIVE.

In order to avoid this type of situation, the Owner or accountant/ bookkeeper should pay the bill with the amount that remained.

You may also like:

IRS

IRS Home Office Tax Deduction Rules & Calculator


Inventory - Irvine Bookkeeping

Inventory vs Cost of goods sold



2. Another liability account is NEGATIVE

Besides the Accounts Payable, other liability accounts could be negative. Every time we pay the loan, we create a debit amount to decrease the loan account. One day, we pay off all the loans and make the balance is $0.00. If the liability account is Negative, there are 2 situations:

- We overpaid the loan, or we paid much more than the loan amount.

- Or: there is no opening balance, all loan payments were recorded as debit, and make the balance is negative.

Let’s take a car loan as an example for the second situation. The image below shows how to record a new car into QuickBooks.

Negative Liability - Irvine Bookkeeping

From this case, we can see that the total value of the car is $36,974.15. Therein, the total loan is $28,224.15; The down payment amount or the prepaid amount is $5,000. The rest is money for manufacturer rebate.

The total loan is recorded in the Car Loan as the beginning balance of this loan, which means a credit transaction. Then, every period the company will exceed the loan amount as every DEBIT until the loan amount is $0.00

Negative Liability - Irvine Bookkeeping

So, in order to avoid the negative liability balance, we need to enter the total loan amount. If not, the account balance is always negative or worse, we will pay this loan without end.

If you need advice or services on any aspect of bookkeeping, accounting, and tax, our specialists are ready to help. Get in touch with us for a free quote.

#negativeliability #liability #irvinebookkeeping #bookkeepinginirvine #la #ca

Negative Liability - Irvine Bookkeeping

3,484 views0 comments
OUR SERVICES
QUICK ACCESS
CONTACT US
2372 Morse Ave., Irvine, CA 92614
(949) 545-9980
support@irvinebookkeeping.com
  • Facebook - White Circle
  • Yelp - White Circle
  • Twitter - White Circle
  • Google+ - White Circle
SERVICES AREAS
Copyright © by Irvine Bookeeping, Inc.