This article explains negative inventory - its possible causes as well as it effects on your company file. It also outlines steps to fix issues arising from negative inventory.
Negative Inventory is caused by entering sales transactions before entering the corresponding purchase transactions, i.e., you sell inventory items that you do not have in stock.
When you sell items that you have entered into your company file
When you sell items that you have NOT entered into your company file
Negative Inventory can show up on your Balance Sheet but primarily it shows on the following reports:
Inventory Valuation Detail (IVD) report
The IVD is the ONLY report that you can use to evaluate the extent of your negative inventory. Negative inventory shows with negative numbers in the Quantity on Hand (QOH) column.
Negative Item Listing report
If you are using QuickBooks Enterprise 15.0 and later, you can use the Negative Item Listing report. Note that it shows current negative quantities but NOT the past negative quantities.
If you are using QuickBooks Premier or Enterprise 2014 or earlier without Advanced Inventory, you can use your Inventory Center.
A new inventory item has no average cost
Selling inventory that you do not have has driven your Quantity On Hand (QOH) negative and can cause incorrect Cost of Goods Sold (COGS) on your P&L report.
Negative inventory causes errors on vendor reports
The Inventory/COGS transaction is normally on the invoice. Selling out-of-stock inventory causes your next bill to contain an adjusting Inventory/COGS transaction. These adjustments are associated with the vendor and appear on vendor reports.
Inventory Assemblies show incorrect COGS on job costing reports
If you sell assembly items when you have an insufficient quantity on hand, and when you later build assembly items with a cost different from the average cost, the build transaction will have an adjusting Inventory - COGS transaction that is normally included in the invoice. The build transaction does not enable you to enter either a customer:job name or a class so that job costing and class reports cannot include the adjusting transactions.
To keep accurate inventory records, including COGS, it is important to prevent inventory quantities from falling into a negative status. Avoid selling assembly items when there is an insufficient quantity on hand. If a sale is made when the QuickBooks records have not yet been updated with build information, be sure to enter the build transaction before the sales transaction to help ensure correct reporting.
Note: Negative inventory can put your cash basis balance sheet out of balance
Reminders before attempting these solutions
Your first transaction(s) for an item are sales
If your inventory reports are incorrect because you have not established an average cost, you can cause them to display the correct values by assuring that the earliest dated transaction for an item is a bill, check, credit card charge or Adjust Qty/Value on Hand:
You have sold inventory items without recording purchases
You may have entered Bills with accounts and not inventory items. If so, edit the Bills change the entries from the Expenses Tab to the Item. Be aware that this may alter your inventory expenses. Consult with your accounting professional before undertaking this process.
You have entered purchases or adjustments before entering sales
If you can do so legitimately, adjust the transaction dates such that bills are dated before invoices:
To prevent these issues from occurring: Do not sell inventory items until you have purchased them and entered the purchases into QuickBooks
Set up inventory items with an opening balance
Use Sales Orders or Estimate to enter sales for which you do have inventory
Use Pending Invoices to enter sales for which you do have inventory