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Negative Inventory Balances

Inventory handles negative inventory balances as follows:

Positive or Zero On-Hand Quantity

For each receipt transaction, if the new on-hand quantity is positive, Inventory uses the transaction cost (such as the purchase order price) to calculate the average cost.

Negative On-Hand Quantity

If the new on-hand quantity is negative or zero after the time of the receipt, Inventory splits the transaction into two parts, if necessary:

Quantity from negative to zero Inventory uses the current average cost of the item--rather than the transaction cost--for that portion of the receipt quantity that increases the on-hand balance from negative to zero. For example, if the on-hand balance is -25, and the receipt quantity is 40, Inventory receives 25 each at the current average cost. In effect, this does not change the average unit cost of the item.
Quantity from zero to positive Inventory uses the transaction cost for that portion of the receipt quantity that increases the on-hand balance from zero to positive. From the example above, Inventory receives 15 each at the transaction cost. In effect, this establishes the unit cost of the Transaction as the new average cost of the item. Inventory writes off any difference between the total receipt cost and the cost charged to your inventory to the average cost variance account.
This feature insures that the accounting transactions you report to the general ledger and your inventory value reports balance at all times.

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