Can You Have a Negative Accounts Receivable in Accounting?
You can never have negative accounts receivable in accounting. Also known as customer receivables, accounts receivable constitute money a business expects to receive from clients. If the business doesn't sell merchandise or provide services, it has no account receivable. The bad debt account reduces the customer receivables account, but it never brings the account's balance below zero.
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Mechanics
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When a company delivers goods or provides services to a client, a bookkeeper posts a specific journal entry, depending on the transaction. If it's a credit sale, the bookkeeper debits the customer receivables account and credits the sales revenue account. If the transaction is a cash-on-delivery deal, the bookkeeper debits the cash account. This accounting practice of debiting cash has an incremental effect on company money, unlike the banking habit of debiting customers' accounts to reduce their balances.
Spotting Repayment Trouble
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When a customer is unsuccessfully coping with economic tedium, a business may either record the client's account as noncollectible or charge it off outright. The latter scenario, albeit drastic, might be necessary if there's no hope of recovering part or all of the balance owed. Classifying a patron's account as noncollectible calls for the account's transfer into the "bad debt" category -- a scenario that enables in-house credit managers to initiate the long and often tedious task of talking to the client and pondering ways to recover the receivable.
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Bookkeeping
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To record a noncollectible account, a junior accountant -- the other name for a bookkeeper or accountant trainee -- debits the bad debt expense account and credits the "allowance for doubtful items" account. As a contra-asset account, the latter item reduces the customer receivables account and might bring it down to zero, but never into negative territory. To charge a customer's account outright, an accountant trainee debits the bad debt expense account and credits the customer receivables account.
Financial Reporting
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Accounts receivable transactions touch on a company's bookkeeping gamut, from assets and expenses to revenues, liabilities and equity items. Customer receivables and the "allowance for doubtful items" account are integral to a statement of financial position, also referred to as a statement of financial condition or balance sheet. Bad debt makes it into a statement of profit and loss, a phrase synonymous with "statement of income," "P&L" and "income statement." Noncollectible accounts increase company expenses and reduce net income, a duality that ultimately has an adverse effect on retained earnings -- which are integral to a report on changes in shareholders' equity, also known as an equity statement.
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