When we think of accounts receivables, we often think of debit and credit. A normal accounts receivable balance is applied as a debit. This means that a credit, when improperly applied, can look like a negative balance.
A negative accounts receivable balance does not necessarily translate into negative cash flow. In fact, it can even be caused by customer overpayment.
The problem is that your account receivable balance sheet won't add up due to a negative accounts receivable. To properly analyze your payments process, fixing these negative balances is essential.
We've curated the top four reasons that your A/R is showing a negative amount:
Data Entry Errors
There are two areas where a data entry could create a negative account. They are:
- Errors in journal entry posting
- Incorrect deposit or prepayment records
In the first instance, an account receivable professional accidentally posted a transaction to the wrong account, extended credit to the incorrect account, transposed numbers, or any other kind of mistake. This is a common mistake when matching payments manually, but it can seriously disturb the balance sheet. Implementing a process during your monthly closing process to weed out potential data errors will help, but automating AR can help eliminate human errors altogether.
The second option is a bit more complicated. When recording a prepayment or deposit, the payment isn’t an account receivable but a liability. In fact, a receivable is only generated once an invoice is created and sent to the customer. Logging a regular payment before the goods or services are delivered creates a negative accounts receivable. The prepayment should be first recorded as a credit to a liability account to remedy the situation. The prepayment amount should be debited once the goods or services are delivered and the invoice is sent.
In some cases, it may seem like a customer will never pay an overdue invoice. Usually, this is marked by the payment terms, such as 60 or 90 days. When an overdue invoice lapses past the arranged payment term, the receivables are recorded as bad credit through debiting the bad debt expense and crediting A/R for the same amount. This creates a zero balance to level the books. In the case of late payment, the account balance becomes negative. You will then need to fix the bad debt expense entry to resolve the negative amount and balance the books.
There are specific scenarios when your team may decide to extend credit to a customer. For example, if a product is defective or service was delayed, it's common to provide compensation.
But when an accounts receivable professional records credit without realizing the customer payment has 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. To fix this negative account balance, you will need to record a liability of equal value.
Collected More Payment than Billed
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. You will need to create an accrued liability to level the balance sheet, just like with credit extensions or prepayments.
Normal Accounts Receivable Balance
The normal accounts receivable balance should show a debit balance, as receivables are listed as assets.
Usually, an A/R professional generates an invoice and sends it to the customer. If using an ERP or invoicing software, a positive balance indicates that a customer still owes money, while a negative balance suggests that the organization owes money to the customer. The account will be hidden in the payments dashboard or marked as paid when an organization receives payment, depending on how the reports are created.
Ensure Proper AR Health with Invoiced
AR is the lifeblood of your business and, without the ability to get a clear pulse on cash flow, it's impossible to make informed decisions. 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. This is why more and more organizations are choosing to automate their accounts receivable process.
By automating the AR process, you can reduce or even eliminate potential errors that would make your accounts receivable balance negative. At the same time, you can reduce collection costs, provide a better customer experience, and save time for more high-value tasks. But perhaps the biggest game-changer is enhanced AR intelligence. End-to-end AR automation gives an in-depth look into your receivables process, allowing your team to make better decisions.
Learn more about how A/R Intelligence can transform your operations.