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Avoid Negative Quantity on Hand (QOH) a/k/a 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.

Negative Inventory can show up on your balance sheet, but primarily it shows on the Inventory Valuation Detail (IVD) report with negative numbers in the Quantity on Hand (QOH) column. The IVD is the ONLY report that you can use to evaluate the extent of your negative inventory.  

How inventory transactions work

When you sell items that have been entered into your company data file:

  1. You purchase items using the Items Tab on a bill, a check or a credit card charge, debiting inventory and crediting A/P, Cash, or Credit Card Payable.
  2. You sell items on invoices or on sales receipts, but never more items than you have on hand.
  3. The sales transaction actually records two transactions:
    1. The Sales/Receivable transaction, debiting A/R and crediting Sales
    2. The Inventory/COGS transaction, crediting Inventory and debiting COGS.
       
  4. You run P&L and expense reports which show the invoices and sales receipts because they record both the income and the expenses.
  5. You run B/S reports which show bills, checks and credit card charges because they record increases in inventory. B/S reports show invoices and sales receipts because they record the decreases in inventory.

When you sell items that you have NOT entered into your company data file:

  1. The invoice records the Sales/Receivable transaction as expected.
  2. For the Inventory/COGS transaction, QuickBooks assumes that the average cost of the items not on hand is either:
    1. The same average cost as the items you had on hand OR
    2. The Item Cost from the Item List.
       
  3. QuickBooks records the Inventory/COGS transaction using the assumed cost.
  4. If the next purchase is not at the assumed cost, then the purchase transaction must record an adjustment to Inventory and COGS to correct the difference.
  5. Because the bill now affects COGS, it appears on the P&L and other reports that show expenses.

NOTE: The Inventory/COGS transaction report never appears on the the transaction, but you can see it by running the Transaction Journal report.

NOTE: Bills, checks and credit card charges with Inventory/COGS adjustments will appear on the Transaction Detail by Account and Account QuickReport for a Cost of Goods Sold (COGS) account.

Issues you may see

 

How to fix it

 

How to prevent negative inventory

To prevent these issues from occurring: Do not sell inventory items until you have purchased them and entered the purchases into QuickBooks.

 

 

KB ID# SLN73714
12/20/2014 9:15:20 AM
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