How to Record a Negative Cash Balance

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Cash is a balance sheet account that reflects the ending balance for an accounting period, which could be a month, quarter or year. A negative cash balance can result from writing checks or making electronic transfers that exceed the cash balance on the books. The accounting entries to increase and decrease the cash account are a debit and credit, respectively. Positive and negative cash balances are known as debit and credit balances, respectively. Record a negative cash balance using either a separate account or the accounts payable account on the balance sheet.

Enter the negative cash balance in a separate account. The AccountingTools website suggests "overdrawn checks" or "checks paid exceeding cash" as possible account labels, while the AccountingCoach website suggests "checks written in excess of cash balance." Whatever the label, the account should be listed in the current liabilities section of the balance sheet. For example, if there is a negative cash balance of $100, credit (increase) the overdrawn checks account and debit (increase and zero out) the cash account by $100 each. Therefore, cash will have a zero balance and the overdrawn checks account will have a $100 credit balance.

Record the negative cash balance in accounts payable. Maintaining a separate account for small and temporary overdrawn accounts could clutter up the balance sheet without providing additional useful information. Continuing with the example, instead of creating a separate account, simply credit (increase) accounts payable by $100 and debit (increase and zero out) the negative cash balance.

Clear the negative cash balance. Settle negative cash balances quickly unless your business is in financial trouble. Businesses often buy overdraft protection on their bank accounts even though banks may allow checks to clear even if the funds are not there as a courtesy to their business customers. To conclude the example, if you make a cash sale of $500, credit (increase) the sales account by $500, debit (decrease) the accounts payable or the overdrawn checks account by $100 and debit the cash account by $400 ($500 - $100). You now have a positive cash balance.

Tips & Warnings

  • A negative cash balance on the books does not necessarily mean a negative balance at the bank. It may take four days for a check to clear, during which time cash deposits or transfers from customers might be sufficient to cover the written checks.

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