Negative Cash Balances

Imagine that a company has a $5,000 bank balance and a $20,000 outstanding check, making its book balance ($15,000). How should this negative cash balance be treated? A negative cash balance is reported as a current liability.

If you have two accounts at the same bank, and one account is positive and the other is neg- ative, you net the two together. This netting rule only applies when the accounts are at the same bank. If you have accounts at two separate banks, and one is positive and the other is negative, you can’t net them together. In other words, the positive bank balance would be a current asset (i.e., cash), and then the negative balance would be a current liability.

Study Tip: Negative cash balances are reported as a current liability. They can only be netted together with a positive balance if the accounts are at the same bank.

Practice Question – Negative Cash Balances

Smith Co. has a checking account at Small Bank and an interest-bearing savings account at Big Bank. On December 31, Year 1, the bank reconciliations for Smith are as follows:

Big Bank

Bank balance $150,000

Deposit in transit 5,000

Book balance 155,000

Small Bank Bank balance $1,500

Outstanding checks -8,500

Book balance -7,000

What amount should be classified as cash on Smith's balance sheet at December 31, Year 1?

What amount should be classified as cash on Smith’s balance sheet at December 31st, year 1? We have two different bank accounts (Big Bank and Small Bank). The question provides the bank balance, the reconciling items, and the book balance. All we care about is the book balance, because that’s what is reported on the balance sheet.
Big Bank has a book balance of $155,000, and Small Bank has a book balance of ($7,000). Since these are two different banks, we can’t net the two amounts together. The $155,000 would be reported as cash, so $155,000 is the correct answer. The ($7,000) balance at Small Bank is reported as a current liability.