How to correct inventory with negative cost or zero quantity but positive value in average inventory costing

In a business, users can come across instances where some inventoried products would have negative cost or zero quantity but a positive value in the average inventory costing method.

Negative costs are widely caused by adjustments and bill postings, or when the inventory transfer is done after the order is received. These values cannot be adjusted using the normal inventory adjustment method.

You can use this report called Non-Zero or Negative Inventory Value report. This report lists any product with zero quantity on hand but a non-zero value or 0 quantity with negative values.

Here we explain the flow of transactions in Negative cost or Zero Quantity but positive value in average inventory costing with a scenario

Consider this scenario:

You receive some inventory at the cost of 100 dollars. Inventory is recorded in the system with a value of 100, which is then added to the inventory asset account for the product.

Then you sell all of the inventory. The system deducts 100 from the inventory asset account. You now have 0 value in the inventory asset account.

You then receive a bill for the shipment receipt at a cost of 90 (discount offered by your supplier).

You can also go into negative if you transfer stock to another facility. And then correct the cost of the stock to a lower value.

You would need to create a draft transaction that debits the inventory asset account for the inventory sub-account for the product and credit a balancing account in the case when you are increasing inventory value. When you are decreasing inventory value, you would need to credit the inventory asset account and debit a balancing account.

To find this sub-account, just type in the part number into the account search field when creating a new line for a GL transaction. The asset account you are looking for would have a name that looks like this Asset – Asset account name – P/N part number.

Post this GL entry to correct your inventory balance.

Please note: This article is for the company that has chosen to track its inventory in the average inventory costing method. For companies using FIFO, please refer to this article.