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Negative Liability on Balance Sheet

Updated: Apr 3


Negative Liability on Balance Sheet

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.

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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.

 

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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.

Negative liabilities can throw off a company's financial analysis, which can change liquidity numbers and could give stakeholders the wrong idea about the company's financial health. To keep up with accurate financial reporting standards and protect the integrity of your financial records, you need to take care of these problems right away.

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After your review, considering professional bookkeeping services might be your next best step if you find the process overwhelming or if errors persist. Our expertise in bookkeeping and accounting can provide the precision and guidance needed. Ensuring your financial statements are error-free and reflective of your business's actual financial state.

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Negative Liability - Irvine Bookkeeping
 

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