Negative Liability on Balance Sheet
A Balance Sheet gives you a financial snapshot of the company as of the specific date. It calculates how much the company worth (its equity) by subtracting all money it owes (Liability) from the money it owns (Asset). Balance Sheet complies the accounting equation:
ASSET = EQUITY + LIABILITY
Liability is an obligation toward another party to pay money, delivery goods and render service. In this blog, we discuss about 2 common situations of Negative Liability.
1. ACCOUNTS PAYABLE is NEGATIVE.
Accounts Payable is current liability which is used to ensure that you will not miss any opening bill. Every time we create bill, QuickBooks records a credit with the bill amount. When we pay bill, QuickBooks records a Debit with the payment amount. Therefore, 2 figures should be matched. If the amount is POSITIVE, we still owe vendor. But, why do we have the negative amount here? Maybe the company overpaid Vendors.
Let’s analyze this situation:
On 05/01/2020, we create a bill equals $300 for Merrill Communication. When recording vendor’s bill, the Accounts Payable increased $300.
On 05/25/2020, we paid that bill. Unfortunately, we paid with the amount of $334.71, the exceed = $6.00 makes the Accounts Payable NEGATIVE.
In order to avoid this type of situation, Owner or accountant/ bookkeeper should pay bill with the amount remained.
2. Another liability account is NEGATIVE
Besides the Accounts Payable, other liability accounts could be negative. Every time we pay loan, we create a debit amount to decrease the loan account. One day, we pay off all the loan and make the balance is $0.00. If the liability account is Negative, there are 2 situations:
- We overpaid the loan, or we paid much more than the loan amount.
- Or: there is no opening balance, all loan payments were recorded as debit and make the balance is negative.
Let’s take car loan as an example for the second situation. The image below shows how to record a new car into QuickBooks.
From this case, we can see that the total value of the car is $36,974.15. Therein, total loan is $28,224.15; The down payment amount or the prepaid amount is $5,000. The rest is money for manufacturer rebate.
The total loan is recorded in the Car Loan as the beginning balance of this loan, which means a credit transaction. Then, every period the company will exceed the loan amount as every DEBIT until the loan amount is $0.00
So, in order to avoid the negative liability balance, we need to enter the total loan amount. If not, the account balance is always negative or worse, we will pay this loan without end.