Before You Start

This guide assumes you have a strong understanding of inventory accounting workflows (e.g., FIFO, Average Cost) and administrator access to your accounting software.

Overview

30 min
Estimated Time
Advanced
Difficulty
As Needed
Frequency

What You’ll Learn

  • How to identify common causes of negative inventory/COGS
  • Methods to diagnose issues within your accounting software
  • Implementing corrective journal entries or adjustments
  • Strategies to prevent future occurrences of negative balances

1. Preparation Steps

Ensure these accounts are properly configured in your accounting software:

Required Accounts

  • Inventory Asset (Other Current Asset)
  • Cost of Goods Sold (Cost of Sales)
  • Inventory Adjustments (Expense)

Recommended Tools

  • Trial Balance Report
  • Inventory Valuation Summary
  • General Ledger Detail Report

2. Common Causes of Negative Balances

Negative balances often stem from specific data entry or system configuration issues.

Cause A: Incorrect Transaction Dates

This occurs when sales are recorded for inventory that hasn’t been officially received into the system.

Pros of Identifying:
  • Simple to correct if caught early.
  • Highlights specific workflow issues.
Cons of Occurrence:
  • Skews historical inventory data.
  • Impacts period-end financial reporting.

Cause B: Selling Inventory Before Purchase Entry

The system records a sale, reducing inventory, but the corresponding purchase or build entry is either missing or dated later.

Pros of Identifying:
  • Directly points to missing transactions.
  • Improves inventory accuracy.
Cons of Occurrence:
  • Requires adjusting historical entries.
  • Can be complex if many transactions.

Cause C: Improper Costing Methods or Data Entry Errors

Incorrect average cost calculations, unit cost errors, or manual adjustments can lead to negative COGS or inventory balances.

Pros of Identifying:
  • Ensures long-term data integrity.
  • Optimizes system configuration.
Cons of Occurrence:
  • May require system reconfiguration.
  • Significant data review is often needed.

Expert Tip: Always prioritize correcting the root cause rather than just ‘fixing’ the balance. A temporary fix without addressing the underlying issue will lead to recurrence.

3. Step-by-Step: Diagnosing the Issue

The diagnostic process involves a methodical review of your inventory and COGS accounts to pinpoint anomalies.

This process might feel familiar if you’ve done any other accounting clean up. It often starts by running reports and identifying unusual activity in your accounts. This snippet shows an example of a diagnostic query or report parameter you might use:

{
  "account_type": "Inventory Asset",
  "date_range": "last_12_months",
  "balance_threshold": "-0.01",
  "report_type": "General Ledger Detail"
}

4. Diagnostic Steps

  1. 1

    Run Essential Reports

    Generate a Trial Balance and an Inventory Valuation Summary report for the affected periods. Look for accounts with credit balances that should be debits, or vice versa.

  2. 2

    Identify Affected Accounts & Items

    Pinpoint specific Inventory Asset or COGS accounts showing negative balances. Drill down to identify individual inventory items causing the issues.

  3. 3

    Analyze Transaction Details

    Review the General Ledger Detail for the problematic accounts/items. Look for sales transactions without preceding purchase/build entries, or transactions with incorrect dates.

  4. 4

    Cross-Reference with Physical Inventory

    If possible, compare your accounting software’s book inventory with actual physical counts. This helps confirm whether the issue is data entry or a systemic problem.

Common Error: Ignoring Historical Impact

When making corrections, ensure your adjustments do not disrupt prior period financial statements that have already been finalized or audited. Use adjustment dates carefully to avoid reopening closed periods.

5. Correction & Validation

Correction Checklist

  • Post necessary inventory adjustments (e.g., using a journal entry to debit Inventory Asset and credit Inventory Adjustments Expense).
  • Correct transaction dates if applicable, ensuring purchases predate sales.
  • Enter any missing purchase or build transactions.
  • Re-run your Trial Balance and Inventory Valuation reports to verify positive balances.

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