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
- You purchase items using the Items Tab on an item receipt, bill, check or a credit card charge, debiting inventory and crediting A/P, Cash, or Credit Card Payable.
- You sell items on invoices or on sales receipts, but never more items than you have on hand.
- The sales transaction actually records two transactions:
- The Sales/Receivable transaction, debiting A/R and crediting Sales
- The Inventory/COGS transaction, crediting Inventory and debiting COGS.
- You run P&L and expense reports which show the invoices and sales receipts because they record both the income and the expenses.
- You run B/S reports which show item receipts, bills, checks and credit card charges because they record increases in inventory and they show invoices and sales receipts because they record the decreases in inventory.
When you sell items that you have NOT entered into your company file
- The invoice records the Sales/Receivable transaction as expected.
- For the Inventory/COGS transaction, QuickBooks assumes that the average cost of the items not on hand is either:
- The same average cost as the items you had on hand OR
- The Item Cost from the Item List.
- QuickBooks records the Inventory/COGS transaction using the assumed cost.
- If the next purchase is not at the assumed cost, then the purchase transaction must record an adjustment to Inventory and COGS to correct for the difference.
- Because the bill now affects COGS, it appears on the P&L and other reports that show expenses.
Important
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