Why does my balance sheet show a negative balance in an account that can't be negative, and how do I fix it?

Why can't this account show a negative balance?

The IRS's Publication 583 describes double-entry bookkeeping: each account has a left side for debits and a right side for credits, and every transaction is recorded as a debit in one account and a credit in another. AccountingTools' definition of debits and credits says a debit increases an asset or expense account and a credit increases a liability or equity account. An asset's balance therefore sits on the debit side and a liability's on the credit side, and a negative on your balance sheet is a balance on the opposite side.

The sign is information. Either a record is missing or misplaced, or the other party genuinely owes you or you owe them. In that case the amount stays on their record or moves to another account, as below.

What does the negative mean in each kind of account?

The sign means something different in each family:

An inventory account in credit is a separate question, with its own causes and repairs.

What if it's a bank or cash account?

Start with the bank's own balance for the same date. If the bank shows the account below zero, the overdraft is real and no entry should remove it, though the books may hold other errors. If the bank shows money, AccountingTools' definition of a bank reconciliation explains why the two can differ: some transactions are recorded by the business first and others by the bank first, so the balances rarely agree until the reconciliation is done. Uncleared checks make the books lower than the bank: timing, not error, though the bank will follow below zero when they clear unless money arrives first. Deposits the bank received that never reached your books make them too low; record each, against the invoice it pays if it is a customer payment. If books and bank still will not agree, that is a bank reconciliation question.

Which entry errors produce an impossible sign?

Each error is a broken relationship between a settlement and the obligation it settles:

• A settlement with no obligation. A payment or receipt was recorded against payables or receivables, but the bill or invoice it settles was never entered. Intuit's QuickBooks Online help on A/R and A/P balances on a cash-basis balance sheet says unapplied payments are occasionally caused when the corresponding invoices or bills were never entered, and that those must be entered before the payments can be applied to them.

  Enter the bill or invoice only if the purchase or sale is not already in expense or income. If it is, the payment was recorded twice; enter no bill or invoice. A payment recorded both against payables or receivables and straight to expense or income is a separate question.

• A settlement on the wrong record. Both halves exist but are not linked: the payment sits unapplied, or on another customer, vendor, invoice or bill. The same Intuit page says payments not applied to bills or invoices affect payables and receivables negatively, and that you correct this by opening the payments from the customer or vendor register and applying them.
• An obligation recorded twice and settled once. AccountingTools' guide to accounts payable notes that duplicate payments can occur when the same invoice is entered more than once. The duplicate alone overstates the balance; the sign turns negative when the extra copy is cancelled twice, for example by a credit and then by voiding it. If both copies were paid and one is then removed, the other party genuinely holds the second payment, and the negative is a real credit.
• A credit or refund against the wrong account. A credit memo on the wrong customer or vendor leaves a credit on a name that is not owed it, while the name that is owed it still shows the item open. A refund that settled a real credit but was coded to income or expense leaves the credit standing.
• An amount on the wrong side. A journal line entered as a debit instead of a credit, or the reverse, moves the account by twice the amount in the wrong direction.

What does a payment without its bill look like in the ledger?

This example is on the accrual basis. On March 3 you pay Harbor Supply 1,200.00 by bank transfer and record it as a bill payment, but Harbor's bill for the materials was never entered:

With no other open bills, accounts payable carries a debit of 1,200.00, shown on the balance sheet as −1,200.00: the records say Harbor owes you money, and on the accrual basis the materials have reached no expense account.

You find Harbor's bill, dated February 26, enter it from Harbor's document and apply the March 3 payment to it:

Harbor's payable is now −1,200.00 + 1,200.00 = 0.00, and the expense is counted once. Intuit's help on cash and accrual methods in QuickBooks Online says the accrual method records expenses when you receive the bill, here February, and the cash method when you pay it, here March 3. Applying the payment adds no amounts and leaves the bank line untouched. Enter a missing bill only if the purchase is not already in an expense account; if it is, a bill would count it twice. If February is closed or reported, read the closed-period section before dating the bill.

How do you trace the balance to the entries behind it?

Work from the detail, not the total: offsetting items hide each other in a total. Run these steps in order:

1. Note the account, the balance, the date and the accounting basis. In QuickBooks Online, set the A/R aging report's aging method to Report date and run the Balance Sheet on the accrual method for the same date; Intuit's help on matching aging reports says a mismatch is usually the aging report defaulting to current.
2. If the balance sheet is on the cash basis, also run it on the accrual basis for the same date: a negative only on the cash basis may not be an entry error. Intuit's QuickBooks Online help on cash-basis A/R and A/P balances says such a balance typically comes from an unapplied payment or from an A/R or A/P transaction affecting a balance sheet account, and that the second kind can be left for your accountant to reverse when doing your taxes.
3. Open the account's detail. Intuit's QuickBooks Online help on cash-basis A/R and A/P balances says selecting the account's amount on the Balance Sheet opens a Transaction Report, which can show the customer or vendor balance that creates the total.
4. Find every negative name. The same Intuit page says to review the Customer Balance Detail or Vendor Balance Detail report to find unapplied payments. Read the positive lines too: an item shown open that was really paid is often the other half.
5. List the entries behind each negative name and what each is linked to. For accounts without customer or vendor names, run the General Ledger report in QuickBooks Online, filtered to the account, with the Debit, Credit and Cleared columns added, as Intuit's help on ledger reports describes.
6. Look for journal entries posted straight to the account. AccountingTools' control-account definition says a control account's ending balance should match its subsidiary ledger, and that a mismatch may mean a journal entry reached the control account but not the subsidiary ledger.
7. Test for a genuine credit (next section), then name the error class and take its repair from the fix table.

Is it a genuine credit or an entry error?

Decide this before changing anything, because a genuine credit is kept or reclassified, never corrected away. It has real money or a counterparty's document behind it, and the counterparty would agree with it. The usual cases are these:

• Customer overpayment. Money arrived and exceeds the invoice, so it is owed to the customer and stays on that customer's record as a credit. Intuit's help on customer credits and overpayments in QuickBooks Online says a credit left from an overpayment can be applied toward another open invoice.
• Deposit or advance received. AccountingTools' definition of deferred revenue describes a payment from a customer for goods or services not yet provided, which the seller records as a liability. It belongs in a liability account such as customer deposits or deferred revenue.
• Vendor credit. AccountingTools' credit-memo definition describes a document the seller issues to reduce what the buyer owes under an earlier invoice, which the buyer records as a reduction of accounts payable. If that invoice was already paid, the vendor sits below zero for a real reason: keep the credit on the vendor's record.
• Advance paid to a vendor. AccountingTools' prepaid-expense definition says a prepaid expense is treated as an asset when first recorded because it represents a future economic benefit, so an advance paid before any bill belongs in an asset account, such as a vendor-deposits or prepaid account.

For a vendor, AccountingTools' guide to reconciling accounts payable notes that comparing your records with statements issued by suppliers identifies unrecorded invoices, unapplied credits or timing differences. For a customer, compare the receipt with the bank deposit and the invoice it paid.

Never write off a genuine credit to clear the sign. A customer's overpayment stays on their record until you apply it to another invoice or refund it. A vendor credit on a paid invoice is money the vendor owes you, which you can use against a future bill or ask to be paid. Writing off either removes it from your books. A kept overpayment or vendor credit stays in receivables or payables on your balance sheet; before giving statements to others, ask whoever prepares them whether to show it as a liability or an asset.

Move a deposit or advance with two journal entries on that customer's or vendor's record. Intuit's QuickBooks Online help on cash-basis A/R and A/P balances says to consult an accountant before correcting these accounts with a journal entry.

Apply each later entry to its invoice or bill; make no separate revenue or expense entry, since the invoice or bill records it.

How do you fix each error class?

Each repair either re-links records already in the file or adds or removes an entry:

Prefer a re-link to deleting and re-entering a payment. Intuit's help on reconciliation beginning balances in QuickBooks Online lists editing, deleting or voiding a reconciled transaction among the causes of a changed beginning balance; a re-link is an edit too, but it keeps the amount, date and bank account, so check the reconciliation afterwards, as below. Before treating two entries as duplicates, confirm they are the same document: same counterparty, number, date and amount. For a wrong-side amount, Intuit's help on reversing journal entries in QuickBooks Online gives reversal as a way to fix a debit and credit error and dates the reversing entry the first day of the following month, so check that date before saving.

Why can't a subsystem-maintained account be fixed by posting to it?

AccountingTools' control-account definition says control accounts are most commonly used for receivables and payables. Where your software keeps customer and vendor records, those records, built from invoices, bills, payments and credits, are the subsidiary ledger. A journal entry that pushes the account back to a possible total without landing on those records makes the balance sheet look right while the aging still shows the negative name. Intuit's QuickBooks Online help on cash-basis A/R and A/P balances says to consult an accountant before trying to correct these accounts with a journal entry.

In QuickBooks Desktop Payroll, payroll liabilities work the same way. Intuit's help on Payroll Liability Balances discrepancies says QuickBooks only recognizes that a liability is paid if a liability check is created, so a liability paid by an ordinary check stays open in payroll whatever the balance sheet shows. Resolve such a balance inside the module that maintains it. Intuit's fix is to note the regular check's details, delete it and record the payment again as a liability check through Create Custom Liability Payments or Pay Scheduled Liabilities, and to speak with an accountant or bookkeeper before any liability adjustment. For another payroll product, check that vendor's documentation. Whatever the account, never post an entry whose only job is to flip the sign.

What if the entries sit in a closed or reported period?

If the entries behind the sign are dated in a period you have closed or already reported, for example in a tax return or statements given to others, the fix cannot simply be posted where the error arose, because editing, voiding or back-dating entries there changes reported figures. Diagnose the class and repair as above, but settle where the correction belongs before posting anything; that is a separate question.

How do you confirm the fix didn't just move the sign?

Double entry puts every correction into two accounts, so it always moves an amount somewhere. After the fix, check each of these:

• The account and its detail. Every customer or vendor line in the detail is zero, positive, or a credit you confirmed as genuine and kept on that record, and the balance sheet shows the total of those lines. Any other account ends with a possible balance or one you confirmed as genuine and kept, such as a real overdraft the bank itself shows or a credit the card statement itself shows; an unconfirmed negative still fails this check.
• The other side of each correction. Open every account the correction touched, such as income or expense, another customer or vendor, or a suspense account. A new negative there that you have not confirmed as genuine is the same defect, moved.
• Detail against total. The aging total matches the balance sheet account on the same date, as the control-account rule requires, with QuickBooks Online reports set as in step 1.
• Reconciliations. The ending balance of your last bank reconciliation, which sets the beginning balance QuickBooks Online shows for the next one, has not changed, and each payment you re-linked still shows as cleared.
• Income and expense counted once. Each new bill, invoice or re-coded refund changed income or expense once, in the intended period.
• The next period. Recheck after the next period's entries, because a fix that only changed the total tends to come back.