16 Nov Negative Inventory Balances
Negative Inventory Balances
QuickBooks uses average cost so proper procedures, purchase an item before it sold through the software, are critical. Negative inventory balances for specific items can have significant ramifications to the integrity of the financial reports.
The most common occurrence of this situation is for businesses who “drop ship” products. As soon as the order is placed with the vendor using the Purchase Order feature, the invoice is created for the customer. The problem is that a purchase order is non-posting. Inventory is not updated until the product is received via an item receipt or a bill. The inventory, however, is reduced at the time the invoice is created. In the case of fluctuating prices, this can be a problem for two reasons:
- The software will use the last average cost when the invoice is created, which may be distorted based on the subsequent purchase price. When the item receipt or bill is entered, an entry may occur to the cost of goods sold account to correct the error, resulting in future financial reports being distorted as well.
- The inventory balance is now negative because an item has been sold that has not yet been purchased.
To eliminate this problem in the future, if an invoice is to be created before the documentation from the vendor arrives, first enter an item receipt (which will increase inventory and Accounts Payable, but the amount will not be available in the pay bills window until the bill received box is checked).
The second most common occurrence of situation is an incorrect unit of measure. This has the most dramatic effect on the financial reports. An example is that a product is purchased by the case, but sold as individual pieces. A decision must be made on what the standard unit of measure will be. Is it the purchase is for 12 pieces (i.e. 1 case) so the sale is of individual units? Or, does the business purchase the item by the case and as each piece is sold 1/12 of a case will be removed from inventory. Either method is fine, consistency is key.
Another reason may be simple clerical error. The wrong item was entered, a data entry error occurred for the quantity, etc.
No matter what the reason, the inventory balance should not be negative. Investigate the specific situation that has occurred in the data file and institute procedural changes immediately to eliminate the problem in the future.
List Limits Expanded
For most QuickBooks users, the list limit for the QuickBooks Pro and Premier products of 14,500 is sufficient. For some, however, that is not the case. We have been seeing increased list size for a variety of reasons. One of the most common is the increased number of customers as the result of web site sales. For version 6 and prior, the list limit was doubled for the Enterprise Solutions Product. New with version 7, the Enterprise Solutions limit has been removed.