Negative Cash Balances
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Cash is supposed to be an asset. Sometimes the books say otherwise, and FAR tests exactly how to report it when they do.
How do you report a negative cash balance?
Say a company has a $5,000 bank balance and a $20,000 check outstanding that hasn't cleared yet. The check already reduced the company's books when it was written, so the book balance is $5,000 − $20,000 = ($15,000).
$5,000 − $20,000 = ($15,000)
A negative cash balance like this is reported as a current liability, not a negative asset. You can't show cash below zero on the asset side of the balance sheet.
When can you net a negative balance against a positive one?
Only when both accounts are at the same bank. If a company holds two accounts at the same institution and one is positive while the other is negative, the two net together into a single cash figure.
Accounts at two different banks never net against each other, no matter the balances. The positive account is reported as cash, a current asset. The negative account is reported separately, as a current liability.
Same bank, net together. Different banks, never net. That single rule decides every negative cash balance question FAR asks. Check which institution each account sits at before doing anything else.
Worked example: two banks, one negative balance
Smith Co. has a checking account at Small Bank and a savings account at Big Bank. At year-end, both accounts were reconciled:
| Big Bank | Small Bank | |
|---|---|---|
| Bank balance | $150,000 | $1,500 |
| Deposit in transit | $5,000 | — |
| Outstanding checks | — | ($8,500) |
| Book balance | $155,000 | ($7,000) |
The question: what amount should Smith classify as cash on its balance sheet? Only the book balance matters here, since that's what actually appears on the financial statements.
Big Bank and Small Bank are two different institutions, so their balances can't be netted. Big Bank's $155,000 book balance is reported as cash. Small Bank's ($7,000) is reported separately, as a current liability.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 95 on FAR. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.
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