Causes of a 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 that are in need of correction.
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The Checking Account Negative Balance
A negative balance may refer to a 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, the bank will likely charge you an overdraft fee to cover the difference, and require that you deposit sufficient funds into the account to make up the difference. From a reporting perspective, you should 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.
The Trading Account Negative Balance
A negative balance may occur in a trading account, when you have lost more money on a leveraged trade than the amount that you initially invested. In this case, you must pay the brokerage the full amount of the negative balance. This is a particularly common issue when you are selling short, since the amount of losses that may be incurred is theoretically unlimited.
