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

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

Sometimes you would find that some inventoried products would have negative cost or zero quantity but positive value.  The reason for the negative cost is often due to adjustment and bill posting , or transfer done after inventory is received. Such values cannot be adjusted using the normal inventory adjustment method.

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

Consider this scenario, you receive some inventory at the cost of 100 dollars. The system records100 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 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 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.

In VersAccounts, each inventoried product has a sub-account under the inventory account the product is using. You use to correct the inventory value of a product by posting to this account.

To correct this, you can do a manual GL entry by going into General Ledger, New G/L entry, new transaction. You would need to create a draft transaction that debit 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 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.

Consult with your accountant on which account should be used for balancing the entry made to an asset account.

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