It is possible to have parts in stock that have a negative value if you are using the FIFO (First In, First Out) inventory valuation method. Here is how that can happen.
- A new part is entered and a single one is bought for $100.00. This gives this inventory item a value of $100.00 and a quantity of 1.
- Three of the parts are sold. This makes the inventory item’s value -$200.00 and quantity -2.
- Two of the parts are bought for $75.00 each. This increases the value of the inventory to -$50.00 and sets the quantity to zero.
- If one more part is bought at this point for $45.00 you will end up with a quantity of 1 and a value of -$5.00.
If you had a lot of negative transactions and your costs declined over a period of time, this could be more dramatic. The beauty of this method is that it is self correcting. As these transactions are flowing to your accounting system the values of the inventory accounts in both programs will eventually match. Unfortunately, this is also the downside of using FIFO and going into negative quantities. If you stop the above example at step 3, everything looks right, until you buy another of the same part. At this point you will still see the system recovering and the results may not be what you expect.
Change Inventory Valuation
It is possible to change your inventory valuation type in ESC by going to Company → System Setup → Inventory and select a different option for the Accounting Type field. Be sure to check with your accountant before making changes to your Inventory Valuation.
Prevent Negative Quantities
It is also possible to prevent a user from selling an item that is not in stock in ESC. This would prevent the quantity of the item from heading into the negatives and also prevent negative values. To do this, head to Company → System Setup → Inventory. Select "No" next to "Allow negative quantities" and click OK.
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