Here is an actual question I received about negative accounts receivable in QuickBooks, from a gal named Kathy:
When I run a Balance Sheet, there is a negative accounts receivable amount. Do you know why?
First let’s talk about a normal Accounts Receivable process. This is when a customer invoice is created first. The invoice raises the balance in the customer’s A/R account, and this amount will appear on A/R aging reports. When the customer pays the invoice, the Customer Payments window is used (also called Receive Payments) and the payment will be applied to the invoice. QuickBooks marks the invoice as “paid,” and removes it from A/R aging reports. So a positive A/R balance means that customers owe the business money. A negative A/R balance means, in theory anyway, that the business owes money to its customers. For example, it might mean that customers are owed a refund.
Negative Accounts Receivable is created by using the Customer Payments window even when there is no customer invoice for which to apply the payment. In that respect, it is using the window in a way that it was not designed to be used. The Customer Payments window always credits the Accounts Receivable account for a particular customer, even if there is no invoice for the payment. When this happens, it always creates a negative balance, also called a credit balance in accounting parlance.
Run an A/R Aging Summary to find the individual, specific amounts that are causing the problem:
Reports > Customers & Receivables > A/R Aging Summary
Adjust the ending date so it matches the ending date on the Balance Sheet.
Double click on each negative amount there. This may take you to the Customer Payment window. If it does, then look in the lower half of this screen. Are there any invoices? Can this payment be applied to any of them? If not, should an invoice be created for the payment? It might be a good idea to consult with the firm’s CPA for advice at this point.
Having said that, people often use the Customer Payments window this way on purpose. I’ve seen this in the case of prepayments, also called customer deposits. From an “accounting theory” standpoint, many accounting professionals would say that these shouldn’t be classified as negative accounts receivable during the bookkeeping process…. they would say that these payments should be classified as an Other Current Liability, even for bookkeeping purposes. Of course, it is totally correct to classify prepayments as Other Current Liabilities for financial reporting for GAAP and I do not mean to suggest otherwise. But it is an open question, to me at least, which method is better for for day-to-day bookkeeping and operational needs when financial statements are not needed for GAAP purposes. It boils down to the skill level of the person doing the bookkeeping, or at least the amount of oversight that person is receiving by an accounting professional. If the negative A/R method is used on a day-to-day basis, it is fairly straightforward to create adjusting journal entries to move the total of the funds to an Other Current Liability account for GAAP reporting purposes, if needed.
I wish Intuit would solve the this problem by placing a checkbox in the Customer Payments window that says, “This payment is a customer prepayment/customer deposit.” Then the software would place the money in an Other Current Liability account. Then, when it is time to create an invoice for the work, QuickBooks would alert the user that a prepayment is available (like it does for billable expenses). But, as far as I know, Intuit has not done this. I wrote about this problem on LinkedIn:
Negative Accounts Receivable is a major pain in the neck. It is a good example of how QuickBooks is not that easy to use, and should be used by people who have solid bookkeeping skills, who understand basic accounting theory. I wish I had a quick way to fix this problem, but I don’t. In this case, an ounce of prevention is worth a pound of cure. Avoid it in the first place and only use the Customer Payments window when there is an invoice already on the books for which to apply the payment.