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Accounts Receivable Negative - Everything You Need to Know

In business terms, "accounts receivable" means the money indebted to an organization by its customers. 

When a company's accounts receivable are negative, it owes its creditors. This can happen for various reasons, but it usually means that the company or the organization is in a financial crisis. If a company's accounts receivable is negative, it is crucial to improve the situation as soon as possible.

For instance, let us assume an organization gets an order from a customer to make some unique products. The sales department promises that the product will be shipped the next day, and the customer signs an order form agreeing to pay for them.

Accounts receivable 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. This is money that the company is owed by its clients. 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.

Accounts receivable are considered negative when a business owes more money to the creditors than it has cash available on hand. The primary reason is because 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.

Negative accounts receivable can strain a company's finances and make it challenging to meet other obligations. It can also damage relationships with creditors and suppliers. 

The Causes of Accounts Receivable Negative

Accounts Receivable Negative and Negative accounts

When we consider accounts receivable, we frequently consider debit and credit. A standard accounts receivable balance is debited. This means that an improperly applied credit can seem like a negative balance. 

Negative cash flow does not always result from a negative accounts receivable balance. Instead, a customer overpayment may be the root of the problem.

The issue is that a negative accounts receivable prevent your account receivable balance sheet from adding up. Therefore, fixing these negative balances is crucial to assess your payment process effectively.

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

1. Invoicing Errors.

Invoicing errors are the first cause of credit balance in accounts receivable. This happens when a customer is invoiced for more than they owe or when an invoice is mistakenly applied to the wrong account. Either way, the result is an overpayment that must be refunded to the customer.

In some cases, customers may inadvertently pay twice for the same invoice. When this happens, the overpayment must be refunded to them as well. In other cases, customers may dispute an invoice because they believe they were charged too much or never received the goods or services they were billed for. The overpayment must be refunded to the customer if the dispute cannot be resolved.

To prevent invoice errors, ensure that your invoices are accurate and clear. This means that the invoice should be easy to read, and it should have all of the necessary information concerning the transaction. If you want to invoice for a specific service or product, then state that fact clearly on the invoice. 

Second, use a billing system that has the needed check and balances. A good practice is to allow the customer to approve the invoice before it is submitted. This will enable the customer to look for and identify any possible errors. You can also implement an invoicing management system that uses email reminders. This will give you a chance to communicate with your customers and ask if they want to approve the invoice or if they want to make changes. 

2. Incorrect Payments.

Incorrect payments are the second leading cause of accounts receivable negative. This means that when a company receives an invoice from a customer, there is a chance that the payment will be for less than the amount owed.

There are various reasons for incorrect payments to happen. First, the customer may have made a mistake when entering the payment amount. Second, the company may have applied the wrong payment to the invoice. Lastly, the payment may have been processed incorrectly by the bank.

Whatever the reason, incorrect payments can quickly add up and lead to a negative balance in accounts payable and receivable. This can strain cash flow and make it difficult to pay other bills or make payroll. If you suspect an incorrect payment has been made to your account, contact your customer immediately to resolve the issue.

3. Return of Merchandise.

When a company sells merchandise on credit, and the buyer returns some of that merchandise, the result is a decrease in accounts receivable. If the value of the returned merchandise exceeds the value of accounts receivable, the accounts receivable account will have a negative balance. Such a situation can occur if the merchandise is defective.  

However, it can also happen if the buyer has changed their mind and wants to return the merchandise. The company must refund the amount paid minus a restocking fee, which will reduce accounts receivable. It may also need to provide a new item for the returned item.

The account in which the refund is credited is Credit Memo Sales Discount. If a customer buys merchandise, keeps it for more than 90 days, and then sends it back for a refund, the company must reduce its receivable account by the refund amount.

The Effects of Accounts Receivable Negative

When a company has accounts receivable, customers have yet to pay for goods or services they have received. This can harm the company's finances.

The company may have to pay bad debt expense, which is the amount written off as uncollectible. This can be a significant expense, decreasing the money the company has available for paying its bills.

The company may also have to make a journal entry to credit accounts receivable and debit bad debt expenses. This will reduce the balance in accounts receivable and increase the bad debt expense on the books.

Overall, having accounts receivable can be a negative experience for a company. It can lead to expenses and journal entries that can reduce the money available to pay other bills.

Risks of Having a Negative Accounts Receivable Balance

For a business, having a negative accounts receivable balance could be better. This can happen when a customer cannot pay their invoice on time or if the company has to return money to a customer. A negative balance can impact the business's cash flow and make it difficult to pay other bills. Additionally, it can damage the business's relationships with its creditors. If the problem persists, the company may have to declare bankruptcy. 

How to Avoid or Fix Accounts Receivable Negative

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

First, make sure you keep accurate records of all payments and invoices. This will help you keep track of what's owed to you and help you avoid any mistakes in billing. 

After the invoice is issued, it is important to get paid immediately. If you wait too long, the customer might not have the cash to pay you immediately. Moreover, try to get your customers to pay you by check or credit card. This can help avoid late payments and incorrect invoicing.

Another way is to adjust the account receivable aging report to include only unpaid invoices. This will help you identify which customers still owe money and need to be contacted for payment.

An effective way to fix receivable accounts is by giving discounts. This can work well, especially for early payments. This will encourage your customers to pay their invoices sooner, which will help you get the money you're owed more quickly.

The Bottom Line

Avoiding or fixing an account's negative receivable balance is essential to maintain a healthy business. A few key ways to do this include always keeping track of invoices and payments, sending reminders for past-due invoices, and offering discounts for early payments. By considering these suggestions and tips, you can make certain that your accounts receivable are in good standing.

To avoid the problems of negative accounts receivable, you can use robust accounting software such as ZarMoney. With ZarMoney, you can implement the best practices for receivable payments. With ZarMoney, you can improve your cash flows by setting up reminders for customer payments.

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