Negative balance definition
/What is a Negative Balance in Accounting?
A negative balance occurs when the ending balance in an accounting record is the reverse of the expected normal balance. This expectation is based on an account's classification within the chart of accounts. A negative balance should arise relatively rarely. For example, if an asset account has a credit balance, rather than its normal debit balance, then it is said to have a negative balance.
The following table shows the normal balance for each type of account, as well as whether a debit or credit balance would give it a negative balance:
Causes of a Negative Balance
A negative balance is an indicator that an incorrect accounting transaction may have been entered into an account, and should be investigated. Usually, it either means that the debits and credits were accidentally reversed, or that the wrong account was used as part of a journal entry. Thus, when closing the books at the end of an accounting period, the investigation of negative account balances is a standard procedure that may uncover several transaction mistakes that are in need of correction.
Related AccountingTools Courses
The Checking Account Negative Balance
A negative balance may refer to a checking account, where you have a negative balance if you have issued checks for a larger amount of cash than is available in the checking account. In this situation, the bank will likely charge you an overdraft fee to cover the difference, and require that you deposit sufficient funds into the account to make up the difference. From a reporting perspective, you should create a journal entry to shift the amount of the overdrawn checks into the accounts payable or a similar current liability account; doing so reduces the balance in the checking account to zero, and properly displays the overdrawn amount as a current liability.
The Trading Account Negative Balance
A negative balance may occur in a trading account, when you have lost more money on a leveraged trade than the amount that you initially invested. In this case, you must pay the brokerage the full amount of the negative balance. This is a particularly common issue when you are selling short, since the amount of losses that may be incurred is theoretically unlimited.