Negative Liability on Balance Sheet: Causes, Examples & Solutions
- Tammy Hoang
- Jun 28, 2020
- 4 min read
Updated: Sep 18
A Balance Sheet gives you a financial snapshot of the company as of the specific date. It calculates how much the company is worth (its equity) by subtracting all the money it owes (liabilities) from the money it owns (assets), specifically focusing on total assets. The balance sheet complies with 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.
A negative liability on a balance sheet is uncommon but important, as it signals something unusual in a company’s records. Normally, liabilities show amounts owed—such as loans, accounts payable, or taxes. When a liability account displays a negative balance, it often points to overpayments, refunds, or accounting errors.
For example, paying more than the remaining loan balance or overpaying taxes can temporarily create a negative figure until adjusted. Vendor refunds or incorrect journal entries may also cause this.
Although sometimes short-term, negative liabilities can distort financial statements, affect ratios, and mislead stakeholders. To maintain accuracy, businesses should review financial records regularly, investigate unusual balances, and correct errors promptly.
Common Causes of Negative Liability
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. Similar issues can also occur with invoices and accounts receivable, especially when a few customers overpay or are refunded, which can result in negative balances if not properly accounted for.
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.
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2. Loan 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.
Negative loan payments or negative accounts receivable can also occur due to mistakes in journal entry or misclassification. These errors may result in the company owing money to customers or showing negative balances that should be investigated and corrected.
Example: Car Loan Recording
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.
Consider a car loan case:
- Total car value: $36,974.15
- Total loan: $28,224.15
- Down payment: $5,000
- Manufacturer rebate: balance of the difference
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.
The principal portion of each loan payment is debited to reduce the liability, while the interest portion is recorded as an expense. Accurate journal entries are essential to ensure the balance sheet and profit and loss statement reflect the true financial position.
>>> 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.
3. Credit Card and Payroll Tax Liabilities are Negative
Negative credit card and payroll tax balances are also examples of negative liabilities, often caused by overpayments or accounting errors.
Credit cards: A negative balance may occur when refunds are issued to the card or when payments exceed the outstanding balance.
Payroll taxes: These accounts may show a negative balance if taxes are overpaid or if transactions are recorded incorrectly
Failing to manage obligations, such as loan repayments and payroll taxes, can lead to financial distress and even negative equity, impacting the company’s financial health. Negative liabilities can also distort financial analysis, alter liquidity ratios, and mislead stakeholders.
Banks and lenders often look for these warning signs when assessing a company’s creditworthiness. To maintain accurate reporting and protect the integrity of financial records, negative balances must be reviewed and corrected promptly.
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