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If you try to record a transaction that would result in a negative inventory balance (physical quantity or dollar value), you will receive a negative inventory balance error like these:
An important part of understanding and acting on this error is knowing how AccountRight tracks your inventory. AccountRight uses the average costing method of recording inventory, which, unlike the first in first out (FIFO) method, calculates the cost of each item in your inventory by using the average cost of the whole group of items. See the FAQs below for more details.
Complications can happen along the way that drop this average price into the negative - but the solution is often as simple as adjusting your inventory.
Note: Managing an inventory is an important part of your business. To get the most out of AccountRight's inventory management system, learn from an expert in our Inventory Management training course.
- Go to the Reports menu and choose Index to Reports.
- Click the Inventory tab.
- Click the Item List [Summary] report (under the Items sub-heading) then click Advanced.
- At the Items field, select the items you want included in the report.
- Select the option Include Zero Quantities.
- Click Run Report.
Compare the quantity and value of the item from the Items List [Summary] report, with those of the transaction. You will see that the quantity and/or value of the item on the transaction will exceed that of the report. Or, the quantity will be the same, but the dollar value will be greater or less.
For instance, Clearwater Pty Ltd want to return some chipped glasses to their supplier. 50 glasses need to be returned at a cost of $0.25 (tax exclusive). When they try to record the purchase debit note (a negative purchase), a negative inventory alert is given.
Note: Item cost is always tax exclusive.
The example below shows the Items List [Summary] report filtered for the glasses.
Comparing the purchase debit note (shown below) with the Items List [Summary] report, you can see that if the debit note was recorded, the quantity of glasses would drop to negative 3, and the total value of the glasses would drop to negative $0.75. As both these values are less than zero, the software will prevent the purchase debit note from being recorded.
From the comparison, the necessary adjustments can be calculated:
- The quantity needs to be increased by 3 glasses, and
- The total value needs to be increased by $0.75
An Inventory Adjustment is used to increase the quantity/dollar value of the items. The amounts will be that of the previous task.
For more information on how to adjust your inventory, see Making inventory adjustments.
You will get the negative inventory balance alert because any of the following transactions have occurred:
- An item type purchase debit note (negative purchase) which exceeds either or both the quantity/dollar value of an inventoried item.
- Editing, reversing, or deleting a recorded item bill which exceeds either or both the quantity/dollar value of an inventoried item.
- Editing, reversing or deleting an item type sale credit note (negative sale). This will remove items from inventory, and as such, the credit note must not remove more quantity/dollar value than is on hand.
- An Inventory Adjustment that attempts to adjust an item's quantity/dollar value to less than zero.
- An Inventory Transfer which attempts to adjust an item's quantity/dollar value to less than zero.
AccountRight uses the 'average costing method' of inventory, which values your individual inventory based on the average unit price. The formula for calculating an item's average cost is:
- Average Cost=Total Value of the item, divided by the Total Quantity of the items.
For example, a purchase of 10 items for $10.00 (tax exclusive) will result in an average cost of $10.00 per item. If the following day another 10 items were purchased for $12.00 (tax exclusive), then:
- The total quantity of the items on hand=20 items.
- The total value of the items=$220.00.
- The average cost of the items=$11.00 ($220.00/20)
Complications can sometimes occur if differently priced items are taken out of the inventory and others are returned - while the item's average cost would remain the same.
In the example above, say after the second purchase, 10 items were sold, the 10 remaining items would retain their average cost of $11.00 ($110.00 Total Value). If the remaining 10 items were to be returned to the supplier at a price of $12.00 each ($120.00 Total Value), then the debit purchase note will result in a:
- Zero quantity and
- A less than zero dollar value
Because of the less than zero value, the negative inventory error will be displayed. To correct this, an Inventory Adjustment will first be needed to increase the Total Value of the items. The inventory adjustment will show zero quantity, a zero unit cost and a positive $10.00 in the amount column.