How Can Accounts Receivable Be Negative?

Published on November 9, 2023

Accounts receivable relates to the money customers owe to a business on credit. When these customers owe your business money, you’ll have a positive accounts receivable balance; when a business owes these same creditors money, you’ll have a negative accounts receivable balance.

To put it another way, a positive balance indicates that a customer still owes your business money, while a negative balance suggests that your business owes money to a customer.

Having a negative A/R balance can signal financial difficulties, but not always. A negative accounts receivable balance is frequently the result of errors that can, with time and attention, be fixed.

Here are the top reasons you might see negative accounts receivable error on your balance sheet — and what you can do about it.

1. Invoicing and data entry errors

Errors in journal entry postings

It’s a fact of life that manual data entry leads to errors. An account receivable professional may have accidentally:

  • Not input the invoice at all
  • Transposed numbers
  • Input the wrong amount altogether
  • Created duplicated entries 
  • Posted a transaction to the wrong account
  • Extended credit to the wrong account
  • Input dates incorrectly, changing the chronological order of transactions 

And so on. These errors may be common, but they can seriously disturb the numbers on your balance sheet — particularly if these errors go unchecked. 

The fix: Implement a check-in during your monthly closing process to weed out potential data errors and/or automate your account receivable processes to eliminate human errors virtually.

2. Your prepayments were recorded as receivables

An account receivable is generated only once an invoice is created and sent to the customer. They’re recorded as assets. Customer prepayments are not invoiced and are, therefore, not account receivables. They’re recorded as liabilities. 

As such, logging a prepayment before the goods or services are invoiced creates a negative accounts receivable. 

The fix:  Prepayment should be first recorded as a credit to a liability account. Then, the prepayment amount should be debited once the goods or services are delivered and the invoice is sent.

3. A debt was written off prematurely

Sometimes, it may seem like a customer will never pay an overdue invoice. As they slide past their payment term dates by 30, 60, and 90 days, it’s a natural and healthy part of accounts receivable management to write off these expenses by debiting the bad debt and crediting your accounts receivable for the same amount.

However, should a long overdue account pay up after you’ve already reconciled the debt (we see this most often when a new manager takes over), their payment will create a negative accounts receivable balance.

The fix: To balance your books again, you must reverse the write-off and record the receipt of the new payment.

4. Unaccounted for credit extensions

Your company may decide to extend credit to a customer when a product is defective or missing or if a service is delayed. But if accounts receivable professional records that credit without realizing the customer payment has also been recorded, the amount is deducted from the A/R balance. 

For example, if an account paid $2,000 in receivables and you extended $500 in credit, the A/R balance would be negative $500.

The fix: Record a liability of equal value to the extended credit.

5. Your customers have overpaid you

If a customer pays more than the invoiced amount, this creates a negative account balance, and the company now owes the difference to the customer. This can happen for several reasons:

  • Data entry errors on the part of the customer (similar to those listed above)
  • Application of payments to the wrong invoice
  • Incorrect payment processing by the bank

The fix: Contact the customer and inform them of the error, then create an accrued liability to level the balance sheet (just like with credit extensions or prepayments).

Automation can reduce the likelihood of negative accounts receivable

Accounts receivable automation can significantly reduce the likelihood of accounting errors like negative accounts receivable by streamlining processes and minimizing manual intervention. In particular, automated AR software can improve 

  • Data accuracy: Automated systems virtually eliminate manual data entry, reducing the risk of typographical errors and ensuring accurate customer information, invoice details, and payment amounts.
  • Invoice generation and delivery: Automated software can generate invoices automatically based on predefined templates, ensuring consistency and accuracy in invoice content. This enables prompt delivery of invoices and reduces the chance of your customers regularly misreading your invoices due to inconsistencies.
  • Payment matching and reconciliation: A useful aspect of AR automation — particularly about the errors discussed — is that these tools can match incoming payments with the corresponding invoices in real-time, minimizing errors related to misapplied payments or missed transactions.
  • Reminders and follow-ups: Accounts receivable automation can send automated payment reminders based on predefined schedules, reducing missed payments, late fees, discrepancies in payment timelines, and unnecessary write-offs.
  • Reporting and analytics: Automated systems can provide detailed and accurate financial reports, giving businesses real-time insights into their accounts receivable performance. These reports help identify patterns, trends, and potential issues, allowing for proactive decision-making.

Implementing accounts receivable automation can enhance efficiency, reduce the probability of human errors, and help create a more reliable and error-free financial management process. It can also free your AR team to focus on less mundane, manual tasks like vendor relationship management. 

Invoiced: Ensuring accounts receivable health

Without the ability to get a clear pulse on cash flow, it’s impossible to make informed decisions, but a manual data entry process isn’t scalable. Between the potential for human error and the immense time it takes to shuffle through payment data, more and more businesses see the benefits of automating their accounts receivable processes.

Invoiced’s automated accounts receivable software can reduce or eliminate potential errors that would make your accounts receivable balance negative, reduce collection costs, provide a better customer experience, and save time for more high-value tasks. 

To learn more about our solutions, schedule a free demo with an Invoiced representative today. 

Published on November 9, 2023

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