FinancialSoft audits many Electronic Financial Officer reports to be certain that the information is accurate. This has been an excellent learning experience as we work to improve our service. In this process, we have been surprised to see how many companies have errors in their QuickBooks company files that can lead to serious misinformation in a company’s financial statements.
One of the most interesting errors we have observed is in balance sheets that have negative receivables and negative inventory. As a matter of accounting principles, neither of these entries can technically be correct. . These errors are due to entry mistakes that are the result of incorrect postings into QuickBooks files. We have seen this enough times that we thought it would be a topic worthy of discussion.
Negative Receivables: We have observed negative receivables primarily with companies that take prepayments before they deliver the finished goods to their clients. This is similar to a contractor requiring 50% upfront before the work is started, expecting the remaining balance when the work is complete. Other examples we have seen include custom products such as logo clothing as well as custom-built kitchen cabinets.
There are various reasons that accounts receivable appear to be negative for these types of companies. Unfortunately, many of these companies we have seen appear to have no issue with their negative receivables as their view is that since they have been paid in advance, that event can be considered a “negative” receivable. In reality, when you book an order with an advance payment, that advance payment is a liability and the correct accounting procedure is to put the entry into the liability portion of the balance sheet.
The reason it is a liability is that if the company does not perform the work contracted, the company will be liable to return the prepayment. This is not too different from a lawyer requiring a retainer before work is done. If the client for the lawyer terminates the lawyer’s services before the retainer is consumed, the lawyer is required to refund the remainder of the retainer. So, whatever the cause of your balance sheet account receivable being “negative,” your bookkeeper or accountant needs to correct that error and post the entry as a liability on the balance sheet…
Negative Inventory: This is often caused by taking credit for a sale before the product or services are delivered. In correct accounting practice, a company cannot take credit for sale before the goods or services are delivered. You certainly can have a sales backlog for undelivered product, but you should not take sales credit if it is not been delivered. So the inventory account on the balance sheet should never go negative and if it does appear as a negative number, your bookkeeper or accountant needs to rectify that situation.
It is critical to the success of a business that its financial books be as accurate as possible so that you have the most accurate decision making information available… Inaccurate financial records can lead to financial headaches. Negative receivables and negative inventory are great examples of two inaccuracies that can lead to problems in the business. Not only can it lead to bad decision-making, it can also be misleading to your stakeholders and have unpleasant tax implications.
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