Negative Inventory Accounting

If we have a sale that creates a negative quantity, shouldn't the cost then associated with the asset be valued at a negative as well on the Asset Report? We are having many problems reconciling our inventory valuation at the end of each month and I am feeling this might be one of the reasons. Does anyone have any insight as to how to treat these negative inventory amounts for accounting purposes?


Thank you.

2 comments

  • VanessaDVanessaD Moderator, Lightspeed Staff Posts: 714 moderator

    Hey @alysonlane ,


    As it is, the asset report will only calculate items that are in inventory. Negative inventory is a way to flag potential discrepancies in the software, so counting them as counters to the asset value would be counter-intuitive.


    Alternatively, you could consult the Negative Inventory report (just below Assets and Reorder List), which will give you the other half of the puzzle!


    Hope this helps!

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    All the best!

    Vanessa

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  • NickSNickS Member Posts: 30

    Hi Alyson,

    Negative inventory is an area that will cause you a lot of headaches when trying to reconcile your LS totals to your accounting.

    It is a bit of a trade off between letting the sales side of your business (especially through ecom) sell things you don't have in stock versus keeping the bookkeeping straight. The old 'auto-add' functionality went about it in a slightly different way that at least gave the back office staff a fighting chance of figuring out what has happened.

    Let's assume you sell something you have never had in stock before. In that case LS will use the default cost for the item OR if you have chosen to use last invoiced cost it will use zero (because it is a new item never purchased before). If you have chosen to use last invoiced (our current setting) it has some pros and cons. The negative inventory report won't ascribe a value, but it will show a negative quantity. If you are using the negative inventory report simply to figure out what you need to order to fulfil the hole in your stock then the quantities will be useful. If you had switched on the use 'default' cost option there would also be a negative inventory value (or if it was an item previously purchased and you were using the 'last purchased' setting that value would be used). The value is pretty meaningless other than it might provide a guide for how much you are going to have to spend to fill the gap. In many ways it would be better not to have a monetary value at all as it is essentially meaningless and at least with a zero value you can search out all the items sold with a 100% margin to know that they were almost certainly down to a negative inventory transaction having occurred.

    The really interesting aspect to all of this is the impact on Cost of Goods Sold. If, like me, you use COGS as part of the reconciliation process this is where it gets messy. The COGS value ascribed to a negative inventory transaction will either be default cost, last invoiced cost or zero depending on your setting. Unless you carry just a few items that always have the same cost the chances are that when you replenish the hole in your stock the purchase invoice will be at a different value to one of the three mentioned (almost certainly different to the zero value which is why that is my preference!!). So the chances are your COGS figure in the accounting will be wrong / misleading. Once the stock comes in and the PO gets processed to plug the hole (assuming the quantity matches the hole) your inventory will return to zero (instead of being negative) - this will be for both the quantity and the value (with the item disappearing from the negative inventory report). Any difference in the invoiced cost will NOT be communicated to your accounting and you will be left with a difference (as the COGS sent over to the accounting was a guesstimate on the part of LS). The difference may not pop up immediately. There is a potential knock on effect in the event of vendor returns being made.

    I've recently been asking for a report that shows the movements relating to negative inventory, rather than just a snapshot in time of the balance of negative inventory. This would be useful in identifying any transactions where the COGS sent over to the accounting is incorrect. I'm not sure if there is a more elegant way than this. Once I can identify the transactions where the wrong COGS has been used I can correct the COGS figure in LS (by going in to the sale and overwriting the value shown) and posting a journal in my accounting for the difference.

    If there was a way of automating this it would be preferable, but I'm not sure where you would even start (at present I'm having to go back and fix prior periods once a negative position is rectified). I could just do period catch ups after the event, but that would screw up the matching of costs to sales and the accurate representation of margins.

    Write now I'd just like better tools and LS to fix some of the issues. BTW if such a thing as your are using LS with Xero watch out for the date of POs being out by one day - that creates endless fun as well when trying to reconcile.....

    Good luck with getting LS to agree to your accounts!

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