Allowing physical negative inventory may have undesirable consequences in inventory accounting, especially if the inventory costing principle is Actual and the valuation method is either FIFO or Weighted average.
Most of the issues that are related to physical negative inventory can be mitigated by using the correct configuration and maintenance of data.
The following table lists the required setup for the Item model groups.
The purchase from the supplier always takes place at a unit cost of 7,500.00.
The following table lists the events as they occur, in chronological order.
The system starts issuing from inventory at cost per unit of 18,750.00 even though the cost of purchase has not exceeded 7,500.00.
Why does this happen?
In order to explain this in better detail, let’s add a few more columns on the rightmost side, in green. These new columns represent the inventory balance after posting the specific transaction. The inventory balance is also known as InventSum.
The issue is that the inventory balance of 1 piece at 18,750.00 is overvalued because the item has never been purchased at a cost higher than 7,500.00. The reason for this overvaluation is that the first issue transaction leaves inventory at a cost per unit of 0.00. The wrong cost estimation will continue to ripple through the following transactions.
The only way to get the inventory balance back in sync is to run either the Recalculation or Inventory close jobs.
The Inventory close will apply the selected Inventory model, in which case is FIFO, and then adjust the cost on the issue transactions accordingly.
Note: If the inventory balance is negative when executing the inventory close, the balance will not be adjusted. A full adjustment can only occur when the balance is positive, and enough receipts exist that can adjust the issues.
By default, all items should have an active cost. If you plan to allow temporary physical negative inventory, which is a valid scenario in certain business, it’s essential to apply an active cost before creating any transactions on the item.