A negative cash balance, often resulting from overdrafts, requires proper accounting treatment on the balance sheet. Here's how to handle it:
Accounting for Negative Cash Balances
The primary way to address a negative cash balance is to classify it correctly within your financial statements.
Cash Overdraft
- Classification: Show the negative cash balance as a Cash Overdraft in the current liabilities section of the balance sheet. The reference provided explicitly states this: "...show the negative cash balance as Cash Overdraft in the current liabilities."
Inclusion in Accounts Payable
- Alternative: If appropriate, you can include the negative balance within accounts payable. The reference mentions this option as well: "Or you can also include the amount in accounts payable." This might be suitable if the overdraft is directly related to unpaid supplier invoices.
Netting Bank Accounts
- Netting Consideration: If you have multiple bank accounts and some have positive balances while others are negative, carefully consider whether netting (combining) them is appropriate. The reference advises: "If you are netting the three bank accounts, consider using the Cash Overdraft option." Generally, netting is only permissible if you have a legal right of offset (the bank can automatically transfer funds between accounts to cover the overdraft). If netting isn't allowed, the overdraft should be shown as a current liability.
Example
Let's say your company has two bank accounts:
- Account A: \$5,000
- Account B: -\$2,000 (Overdraft)
If you are not allowed to net the balances, you would show \$5,000 as cash and \$2,000 as a cash overdraft (current liability) on your balance sheet.
If you are allowed to net, you could show \$3,000 as cash, but the reference advises to show the overdraft separately as a "Cash Overdraft" for more transparency.
Key Considerations
- Transparency: Separately disclosing the cash overdraft provides a clearer picture of the company's financial position compared to simply netting balances (if permissible) or burying the overdraft within accounts payable.
- Bank Agreements: Review your agreements with the bank to understand the terms and conditions of the overdraft facility, including interest rates and repayment terms.
- Internal Controls: Implement robust internal controls to prevent or minimize the occurrence of negative cash balances. This could include improved cash flow forecasting, tighter payment controls, and regular bank reconciliations.
