Should there be negative cash on the balance sheet?

It is possible for a negative cash balance to appear on the balance sheet if a business has issued checks for more funds than it has in its cash account. This information can be misleading, since it implies that a business is deeply in debt (which may or may not be true) and implies that its accounts payable system is out of control. When a negative cash balance is present, it is customary to avoid these adverse impressions by moving the amount of the overdrawn checks into a liability account and setting up the entry to automatically reverse; doing so shifts the cash withdrawal back into the cash account at the beginning of the next reporting period.

There are two options for which liability account to use to store the overdrawn amount, which are:

  1. Separate account. The more theoretically correct approach is to segregate the overdrawn amount in its own account, such as "Overdrawn Checks" or "Checks Paid Exceeding Cash." However, since this is likely to be a small account balance, it clutters the balance sheet with an extra line. Or, if you are aggregating smaller accounts together on the balance sheet, it will not appear by itself on the balance sheet, and so conveys no real information to the user. If so, try the next option.
  2. Accounts payable account. Just drop the amount into the "Accounts Payable" account. If you do, then the accounts payable detail report will no longer exactly match the total account balance. However, as long as the entry automatically reverses, the overdrawn amount should not clutter up the account for long. This approach is especially appealing if overdrawn checks are a rarity.

Based on this discussion, it is reasonable to assume that any time you see a company's balance sheet with a zero cash balance, it brings up the following issues:

  • The company has overdrawn its checking account, which brings up questions about its liquidity, and therefore its ability to continue as a going concern.
  • The company is playing games with its suppliers, printing checks in order to "prove" that checks were created on time, and then holding onto them until there is sufficient cash to keep them from being rejected by the bank.
  • The company is relying upon an overdraft arrangement with its bank to fund these additional payments, which means that it probably suffers from ongoing cash problems.

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