Accounting Best Practices, Fifth Edition

16–31. Immediately Review All Negative Inventory Balances

The impact of a variety of transactional problems can result in the computer system reporting a negative inventory balance. Source problems could include the presence of a transaction backlog where offsetting entries have not yet been made, incorrect cycle counts, improper counts at the receiving stage, picks from stock without an update to the inventory records, and so on. Whatever the cause, negative balances are a clear indicator of inadequate warehouse management, and show that the inventory database cannot be reliably used for materials planning, much less inventory valuation.

The solution is to immediately investigate all negative inventory balances. Investigation means not just correcting the book balance to match the on-hand balance, but also reviewing all underlying transactions to find the reason for the negative balance and following through to ensure that the problem does not happen again. One should create a procedure for spotting negative balances right away. Also, include in the daily warehouse activity list a requirement to print an inventory report sorted in ascending order by quantity on hand, so negative balances appear at the top of the report. Also, since cycle-counters should have expertise in resolving inventory problems, have them correct and investigate the negative balances as part of their daily cycle-counting routines.

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