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:
|Account Type||Normal Balance||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.
At a more specific level, the negative balance term commonly refers to the 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, 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.