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

Overview

This article is for company which has chosen to track their inventory in FIFO(First In First Out) costing method. For companies using average costing, please refer to this article.

Versa tracking your inventory cost using GL sub-account that is created when new inventory is created in the system. Each product has a GL sub-account under the asset account assigned in the product setup. When you receive new inventory from purchase order, a new sub-account is created under the Sub-account for the product. We call this the "FIFO bucket". For an inventoried product, you will have 3 levels of GL structure. At the top, the inventory asset account, in the middle, sub account for each product, at the bottom, sub-sub account created each time new inventory is received.

When you ship out inventory, the system will reduce the inventory value(credit in GL) in this FIFO bucket until inventory values reduces to zero. Then the system will move onto the next FIFO bucket based on first in first out basis.

Use Case

If you use the FIFO costing method for inventory costing, sometimes you would find that some inventoried products would have negative cost in a FIFO bucket or zero quantity but positive value.  The reason for the negative cost is often due to adjustment to shipment receipts and bill posting , or transfer done after inventory is received.

Run  this report called Non-Zero Inventory/Negative Cost Value report which lists any FIFO bucket that has zero quantity on hand but non-zero value.

Consider this scenario, you receive some inventory at the cost of 100 dollar. The system records 100 as the value of the inventory and this is stored in the inventory asset account for the product . Then you sell all of the inventory. The system deducts 100 off the the inventory asset account. You now have 0 value in the inventory asset account. You then receive a bill for the shipment receipt at at cost of 90 (your supplier decided to give you a discount). When this bill is posted, the system would reverse the 100 value as received and the put in a new value of 90. Since the entire inventory was sold at 100 value, this leaves us with -10 as the value of the inventory. You can also go into negative if you transfer stock to another facility and then corrected the cost of the stock to a lower value.

Steps

The easiest way is to run  the report Non-Zero/Negative Inventory Value Report (under Inventory category), it gives you an option to create adjusting GL transactions to clear out all the values . It a draft transaction which means you can review it and revise before posting.

If you want to manually correct this and build your own GL entry, you can do a manual GL entry by going to main menu General Ledger, New G/L entry, new transaction. You would need to create a draft transaction that debit the inventory asset account for the FIFO bucket and credit a balancing account.

In Versa, each FIFO bucket has a sub-account under the inventory asset account. To find this sub-account, just type in the FIFO bucket id into the account search field. The FIFO bucket id can be found by going to Products, Search  Parts, enter the part number of the product. Once you find the product, the various quantity in different facility will be listed. Find the row that has the negative cost. Click on the quantity under On Hand. This view will give you all the FIFO buckets in the system. Note the id under Bucket ID This balancing account can be your cost of goods sold account. Consult with your accountant on which account should be used for crediting.

Post this GL entry and your inventory value would be corrected.