You need to use the inventory feature in QuickBooks to keep track of the “quantity on hand” (QOH) of inventory parts and assemblies, but this could easily add a dimension of complexity that will create problems for a small business. One of these simple problems has to do with allowing negative quantities that occurs. Let’s talk about why QuickBooks negative inventory happens, why it is a poor thing, as well as perhaps you skill to stop it.
Why Negative Quantities Happen
It’s pretty simple. You enter a sales transaction for things that you haven’t received yet. There is a large number of main reasons why this could happen.
The best reason is the fact that inventory control needs time to work. Should you want to track inventory quantities you must enter every transaction that affects inventory. When you yourself have a small business, this will probably create lots of pressure. You HAVE to have the invoices out because that is the method that you receive money. Inventory receipts? Well, much less urgent, you’ll get those updated when you have the full time. So, sales happen before receipts, QOH goes negative.
Another case is that people don’t always understand how QuickBooks works. Perhaps they don’t wish to keep an eye on the amount on hand, but someone turned the inventory feature on and created each of their items as inventory parts. They sell the items, they don’t bother about receiving items, QOH goes negative.
You may be drop shipping what to a person, in order for I really like to record the sale prior to the item is ordered. QOH goes negative.
You may be careful about entering your receipts and tracking inventory. However, generally in most versions of QuickBooks, an item receipt is the same transaction as a bill- when you get the item before you sell it, however the bill for the receipt is dated following the sale date, whenever you replace the receipt into a bill, the date change moves the receiving date to be after the sale. QOH goes negative.
There are some other scenarios, but you have the idea. The core issue here is that QuickBooks allows negative quantities to take place. It could warn you that this will be happening, nonetheless it still enables you to, and there isn’t a method to make the software prevent it from happening.
Read Also: http://accountingpride.bravesites.com/entries/general/negative-inventory-issues-in-quickbooks-desktop Why QuickBooks Negative Inventory is BAD
OK, so, your inventory QOH is negative. What’s the top deal? What about incorrect financial statements, confusing reports, and damaged data files?
Yes, sounds bad, and it might be. I’m not likely to say that all these problems can happen any moment which you have an adverse quantity on hand, but they could.
Relating to Intuit you can view any or each one of these problems when you yourself have negative inventory quantities:
Profit and Loss price of Goods Sold (COGS) amount incorrect
Cash basis Balance Sheet away from balance
Balance Sheet inventory amount incorrect
Vendor reports contain errors
Bills for inventory purchases showing up on income and expense reports
Recurring data damage, relating to Intuit (SLN73714) – you may possibly observe that running a rebuild will bring your b/s back into balance
That is a scary list of issues! We have understood, for years, about how negative inventory make a difference COGS in your financial statements. A number of the other issues are not items that I come across very often (cash basis statements, bills showing in unexpected places). Nevertheless the chance for recurring data damage is a proper concern.
I can’t show you samples of many of these issues, as much they don’t show up until you have a large file with several items and transactions. I would ike to proceed through a very simple exercise to show a number of the confusing issues you may possibly see.
Below are a few transactions that We have for a unique item in my own item list, “Test Part”, that starts off with no quantity on hand:
I’ll enter a bill for 2 for the item at $1.00 each on 7/1/2013. Following this, the average cost of the item is $1.00.
Next I enter a bill for one more two items at $1.10 each on 7/2/2013. Following this, the typical cost is $1.05.
Now I sell six associated with the items on 7/3/2013. Heck, I'm sure there are some along the way, UPS just hasn’t delivered it them me yet.
Let’s look at the transaction journal for my invoice. You can observe it is posting $6.30 to COGS, which will end up being the price of six items in the average cost of $1.05.
That’s OK – the other cost could we use? We don’t know the actual price of the 2 items that We haven’t received yet. My Profit & Loss statement will show this COGS value. My Balance Sheet will show a listing asset value of –$2.10, but that is OK for now.
If I had received them BEFORE the sale, my average cost would have been $1.133 and COGS for the sale will have been $6.80. However, if I glance at the inventory item now it's going to show that the average cost continues to be $1.05? No hassle in this case, I have a zero balance on hand. But, what about my financial statements?
Let’s look in the Profit & Loss Detail report.
The FINAL balance for COGS is accurate – it shows the most suitable value of $6.80 in this instance. However, if you may be finding its way back to audit your reports the truth is some odd things:
The initial invoice transaction is still showing a COGS value of $6.30. If you go through the transaction detail for that invoice you will see this amount, not the greater accurate $6.80. Which means you simply cannot have a look at a specific invoice to look at correct COGS value.
The truth is a Bill turning up in the COGS section. That is not normal – a Bill should not be seen here normally.
The total amount of the COGS from the Bill is $0.50.
An easy task to explain all this when we have a look at a straightforward transaction. Sure, there is a Bill for $0.50 – that is the difference between the initial COGS amount and the corrected COGS amount. Not a problem!
BUT, what if you have hundreds of transactions, a huge selection of items, and also you see these odd numbers? You can’t easily consider the COGS value for an invoice, the truth is odd numbers that don’t seem to own a direct link with any transaction (try doing a “search” for a Bill level of $0.50). These adjustments may bring things back once again to balance in this instance, however if you are reviewing your records you are likely to have a tremendously hard time working this out.
And also this is an incident where the financial statements are accurate – think how dreadful it will likely be if there is actual data damage, as Intuit says sometimes happens?
I wish to point out one of several very nice popular features of QuickBooks Accountant (and Enterprise Accountant) – the Troubleshoot Inventory feature when you look at the Client Data Review. That is an extremely helpful report that may point out negative inventory problems for your needs quickly. It is one of the first things I’ll look at with a new inventory-based client – to see if there are negative inventory quantities.
QuickBooks Troubleshoot Inventory
If you are using this, make sure the date range reflects the time you will be reviewing. For general troubleshooting i do want to make sure that the ending date goes at the very least through the current date (instead of a prior fiscal year, as you might use if you're dealing with financial statements for tax purposes).
Also make sure that you have the option when you look at the lower right set to “any amount of time in date range” if you're wanting to eliminate every one of the problems.
How Do I Fix This?
Some individuals genuinely believe that it could be nice if QuickBooks had a switch that could stop you from having an adverse quantity readily available. Which has hadn’t happened yet – and I’m not necessarily convinced that this would be a universally acceptable answer.
How could you avoid this from being a challenge? Just don’t sell things before you get them. Easier said than done, in certain situations. To start, ensure that this inventory preference is fired up, which means you at the least get a warning if you sell something you don’t have.
QuickBooks inventory preference
In the event that you absolutely have a scenario where you must sell something before it is received/billed, consider using one of the non-posting transactions to generate your documents when it comes to customer. Create an estimate, sales order, or pending invoice for instance. These won’t post to your financial statements, and you will turn them into a posting invoice at a later date. This works in some situations, yet not others.
An alternative choice that I’ll mention is the Enhanced Inventory Receiving function found in QuickBooks Enterprise (V12 and later). Normally, a receipt/bill is just one transaction with a single date. This is often the explanation for many date-related inventory issues for which you receive an item but then get billed for it at a later date. Enhanced Inventory Receiving (EIR) changes this by splitting these into two transactions – a receipt and a bill. Sounds good! However, I’m not necessarily an admirer for this feature. There are issues with it, and a big issue We have is that once you turn this on you cannot transform it off. There are several articles in this web site that talk about a few of the issues.
Other than that, all that is left is always to change transaction dates so that you avoid getting the negative quantity. You can easily move the invoice date as much as the date associated with receipt – but that will screw up your receivables aging. It is possible to adjust the receipt/bill date back into the date for the invoice, but that creates problems for your payables payment dates. If you're a manufacturer and you are clearly building assembly items, moving the date of this receipt around may cause problems if you are using that part in an assembly build – since BUILDS is not completed with negative inventory you may find that your particular assembly builds are changed into “pending” builds in the event that you adjust receipt dates (which is NOT good).
As you could see with my simple example above, QuickBooks will endeavour to create an adjustment to correctly post the COGS values when you bring the negative balance back again to an optimistic value. For simple situations, this works. You've still got issues if someone is attempting to audit your books, or explain why you've got some odd COGS values showing in detail reports, but for many smaller businesses this isn't an issue. The major concerns that We have, and the reasons why I always you will need to “stamp out” negative inventory QOH, are:
Companies that never bring the balances back again to zero or positive – in order for COGS calculations will never be accurate.
Companies that have turned on inventory control, but never do receipts (they should be relocated to non-inventory parts).
Intuit’s statement about corrupted data files and inaccurate reports – I don’t discover how bad the situation has got to be before we come across those forms of problems, but that is very scary!