How to Classify a Deficit on a Balance Sheet

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Occasionally, at the end of an accounting period you may encounter an account with a deficit, or negative balance. Most accounts will not show a deficit; rather, a new account will be created during the accounting period. For example, if customers pay more than what is owed on account, the funds will be allocated to an account, such as Unearned Revenue, instead of causing the Accounts Payable account to go into deficit. But, if your company has no cash on hand and has overdrawn the checking account, the cash balance would show a deficit.

  • Determine the balance of the account in deficit.

  • Choose a classification for the account. It is either an asset, or something with value owned by the company; a liability, or an amount owed by the company; or equity, which represents the owner's interest in the company.

  • Enter a line item into the balance sheet for the account in deficit. Place the item in the appropriate category: either assets, liabilities or equity.

  • Record the account balance in either the debit or the credit column. Record asset accounts with a deficit in the credit column, and liability or equity accounts with a deficit in the debit column.

  • Add all positive account balances together, and subtract any deficits from the total.

References

  • Financial & Managerial Accounting: The Basis for Business Decisions; Jan Williams, Sue Haka, Mark Bettner, Joseph Carcello; 2010
  • Photo Credit Jupiterimages/Photos.com/Getty Images
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