Accounts Receivable Negative - Everything You Need to Know

One situation that often leaves us confused is our accounts receivable going negative. In simple terms, this happens when a business owes more money to its creditors than it has coming in from customers. 

This can lead to some serious financial issues for the company and must be addressed quickly. 

To understand this situation better, imagine your company getting an order and shipping it to the customer right away, but the customer refuses to pay on time. If this happens too often or payments are mismanaged, the company's accounts receivable can turn negative. 

What is Accounts Receivable Negative?

When a business or an organization extends credit to its respective customers, it's said to have accounts receivable. Accounts receivable can be a positive or negative number. If it's positive, the company is owed money. If it's negative, the company owes money.

The primary reason behind accounts receivable negative is that the business has made more sales on credit than it can afford to pay back. When this happens, companies must take out loans or lines of credit to cover their obligations.

The Causes of Accounts Receivable Negative

When we talk about accounts receivable, we often think about debits and credits. Normally, accounts receivable balances are debited. This means that if a credit is applied incorrectly, it can look like a negative balance. 

A negative accounts receivable balance doesn't always mean you're losing cash. Sometimes, it happens because a customer overpaid.

The problem is that a negative accounts receivable balance messes up your balance sheet. Fixing these negative balances is important to understand your payment process better.

The negative balances in accounts receivable are often caused by errors in invoicing, incorrect payments, and merchandise returns. Let us examine the three reasons in detail:

• Invoicing Errors

Invoicing mistakes are the main reason for having a credit balance in accounts receivable. This happens when a customer gets billed for more than they owe or when an invoice is wrongly applied to another account. In both cases, the result is an overpayment that needs to be refunded to the customer.

Sometimes, customers might accidentally pay the same invoice twice. When this happens, the overpayment also needs to be refunded. 

Other times, customers might dispute an invoice because they think they were overcharged or never received the goods or services they were billed for. If the dispute can't be settled, the overpayment must be refunded.

• Incorrect Payments

Incorrect payments are the second biggest reason why companies end up with a negative balance in accounts receivable. This means that when a company invoices a customer, there's a chance the customer might pay less than what they actually owe.

There are a few reasons why incorrect payments happen: 

• The customer might have made a mistake when entering the payment amount. 
• The company might have applied the wrong payment to the invoice. 
• The bank might have processed the payment incorrectly.

Whatever the reason, incorrect payments can pile up fast and lead to a negative balance in accounts payable and receivable. This can mess up cash flow and make it hard to pay other bills or make payroll. 

• Return of Merchandise

When a company sells merchandise on credit and the buyer returns some of it, the company ends up with less money expected to come in (accounts receivable). 

If the value of the returned items is more than what the buyer owes, the company's accounts receivable can even go negative. This might happen if the items are faulty or if the buyer just changed their mind and wants to return them.

In such cases, the company has to refund the buyer, usually keeping a restocking fee. This refund reduces the amount in accounts receivable. The company might also need to provide a replacement for the returned item.

The refund is recorded in an account called Credit Memo Sales Discount. If a customer keeps the items for more than 90 days and then returns them for a refund, the company has to reduce its accounts receivable by the amount of the refund.

The Effects of Accounts Receivable Negative

When a company has accounts receivable negative, it might have to pay a bad debt expense, which is money they can't collect. This expense can be big and leave the company with less cash to pay its own bills.

To keep track of this, the company should make a journal entry. By crediting accounts receivable and debiting bad debt expenses the accounts receivable balance can be lowered and bad debt expense on their books can be increased.

In simple terms, having accounts receivable negative can be bad for a company. It can bring extra costs and bookkeeping that reduce the money available for other bills.

How to Avoid or Fix Accounts Receivable Negative

There are a few ways to avoid or fix an accounts receivable negative balance: 

• Keep accurate records of all payments and invoices to track what's owed and avoid billing mistakes.
• Use an invoicing management system with email reminders. This will help you communicate with your customers and ask if they want to approve the invoice or if they need any changes.
• Get paid immediately after issuing the invoice to prevent customers from running out of cash.
• Encourage customers to pay by check or credit card to avoid late payments and incorrect invoicing.
• Adjust the account receivable aging report to include only unpaid invoices to identify customers who still owe money.
• Offer discounts for early payments to encourage customers to pay invoices sooner and get your money faster.

The Bottom Line

Avoiding or fixing a negative balance in your accounts is important to keep your business healthy. Always keep track of your invoices and payments, send reminders for overdue invoices, and offer discounts for early payments. These tips can help ensure your accounts are in good shape.

To avoid problems with negative accounts receivable, you can use good accounting software like ZarMoney. ZarMoney helps you follow best practices for receiving payments and improves your cash flow by setting up reminders for customer payments.