Negative liability definition
/What is a Negative Liability?
A negative liability typically appears on the balance sheet when a company pays out more than the amount required by a liability . For example, if you were to accidentally pay a supplier's invoice twice, the first payment would reduce the original liability recorded in accounts payable to zero, while the second payment would have no offsetting liability, resulting in a negative liability on the balance sheet.
Negative liabilities are usually for small amounts that are aggregated into other liabilities. They frequently appear on the accounts payable ledger as credits , which the company's accounts payable staff can use to offset future payments to suppliers. Technically, a negative liability is a company asset, and so should be classified as a prepaid expense .
Most negative liabilities are created in error, so their presence indicates problems with the underlying accounting system . For example, the accounting software might not be recognizing and flagging duplicate supplier invoice numbers, allowing invoices that have been submitted more than once to be paid again.