Why is my inventory balance wrong (or negative) in my accounting software, and how do I fix it?

What does a negative inventory quantity or value actually record?

Intuit's QuickBooks Desktop article on negative inventory says it "is caused by entering sales transactions before entering the corresponding purchase transactions": the books show stock leaving before they show it arriving. Intuit's QuickBooks Online article on negative inventory says the same can happen there: "you can accidentally oversell products".

Both products let such a sale post. Intuit's Desktop negative-inventory article says QuickBooks Desktop assumes the missing units cost either the average cost of the units on hand or "The Item Cost from the Item List", and that with nothing to calculate from it "must assign an average cost of $0.00". Intuit's QuickBooks Online article on inventory accounts says that when you sell an item that is out of stock, QuickBooks Online "adjusts the Inventory Asset and COGS accounts based on the next purchase". A negative value is the same event in money: cost left the inventory account before the goods' cost went in.

So read the balance as evidence of entries made out of order or left incomplete; the repair is in those entries. Intuit's Online negative-inventory article adds: "You don't always get a warning message on invoices when you oversell an item."

The causes below arise where cost leaves inventory at each sale, as in QuickBooks Online; Intuit's Online article on inventory accounts says "COGS is debited only when you sell inventory items on invoices or sales receipts". If your books cost stock only at period end from a count, the running-quantity causes do not apply, but an entry posted straight to the inventory account still can; the count itself is a separate question.

How do I find where the discrepancy lives before changing anything?

Run these checks in order, and change nothing until they point to a cause:

1. Compare the two totals at one date. In QuickBooks, run the inventory valuation summary and the balance sheet as of the same date. Intuit's QuickBooks Desktop article on why these two reports differ says "The Balance Sheet report draws information from the accounts whether they are associated with items or not", while the valuation reports "draw information from items only". Intuit's QuickBooks Online article on how inventory tracking affects the balance sheet tells a cash-basis business to "customize the Balance Sheet report and change the accounting method to Accrual". A difference means either something reached the account without passing through an item, or an inactive item still holds value. The Desktop two-reports article names both, and says to widen the date range if inventory adjustments are dated in the future. Agreement rules both out.
2. Separate quantity from cost. Read the valuation summary item by item. Intuit's QuickBooks Online article on sales and inventory reports says it shows "The quantity on hand, value, and average cost for each product". A negative or impossible quantity is a quantity problem; a believable quantity with a wrong value or strange average cost is a cost problem. A positive quantity that differs from what is on the shelf is also a quantity problem.
3. Trace the suspect item. Run the Inventory Valuation Detail report for all dates. The same reports article describes it as "Your transactions for each inventory item, and how they affect quantity on hand, value, and cost". The first line where the running quantity or value goes wrong, or a missing line just before it, is the cause.
4. Bring in a shelf count last. Intuit's Online negative-inventory article says to adjust quantities only after you have "converted open purchase orders to bills", so a difference from a count is not real until every receipt is entered. Trace any item whose count differs through step 3 before adjusting; in an open period, a repeated or wrong-quantity receipt is corrected at the receipt, not by an adjustment. Running and documenting the count is a separate question.

Which cause is it, and which report shows it?

Each cause leaves its own mark:

Should I fix the original transaction or post an adjustment?

As a working practice, not a rule taken from an accounting standard: when the cause is a transaction, correct that transaction only while no month the change would move is closed or reported; the next section's check shows which months move. That repairs the item record and the account together. Intuit's Desktop negative-inventory article says that, if you can do so legitimately, you should "adjust the dates of the bills and/or invoices so that the bill dates are before the invoice dates". A receipt entered without cost is corrected by entering the cost on that receipt.

For entries that bypassed the items, Intuit's Desktop two-reports article says to edit a bill or check "by associating an item", edit an adjustment offset to Inventory Asset "by selecting a different adjustment account", and replace a journal entry with an Adjust Quantity/Value on Hand entry. That article says to delete the journal entries first; to keep the no-delete rule below, reverse each one in the same open period instead, a step that article does not give. On moving bill lines from the expenses tab to items, Intuit's Desktop negative-inventory article warns "Be aware that this may alter your inventory expenses" and says "Consult with your accounting professional before undertaking this process". For an inactive item that still holds value, the two-reports article gives two fixes: reactivate the item, or adjust its quantity.

For what remains, follow these limits:

• Never force the account. A journal entry that makes the inventory account agree leaves the item records wrong, and Intuit's Desktop two-reports article lists such entries among the causes of the totals disagreeing.
• Keep quantity adjustments for real physical differences. Intuit's QuickBooks Online adjustment article says "When you save the inventory adjustment, QuickBooks Online automatically records appropriate adjustments to your Inventory Asset and Cost of Goods Sold (under Inventory Shrinkage) accounts", so an adjustment used to fix an entry error records a loss that did not happen. It also warns: "Be very careful when editing inventory adjustment entries". Accounting for lost, damaged or stolen goods is a separate question.
• Do not delete to tidy up. Deleting removes the history of what was wrong and what changed. Intuit's article on voiding a transaction from another period in QuickBooks Online says: "Instead of removing the transaction, you can record a reversing entry to void a transaction in another period"; use that only for a transaction without inventory items. For a transaction that carries inventory items, correct it with an item-level transaction in the open period: the missing or corrected receipt, or the item-level adjustment. A reversing journal entry changes the account but not the item records.

What does a back-dated fix do to cost already reported?

Back-dating a receipt can re-cost the sales it now precedes, and that cost can land in months already reported. Microsoft's Business Central article on cost adjustment sets out the mechanism for that system: it "updates the cost of goods sold (COGS) for historic sales entries", the new entries "have the posting date of the related invoice", and where they would fall in a closed accounting or inventory period, or before the Allow Posting From date, "the batch job assigns the posting date as the first date of the next open period". The same article says cost moves only when the Adjust Cost - Item Entries batch job or automatic cost adjustment runs, and that the Post Inventory Cost to G/L batch job "posts the new value entries to the general ledger". In Business Central, run both before step 1's comparison and before the after-change comparison. In QuickBooks Desktop, Intuit's Desktop negative-inventory article says a late purchase's cost adjustment reaches the profit and loss "Because the bill now affects COGS". That article does not say which period the re-costed sale lands in when that bill is re-dated; the before-and-after check below shows it.

Before back-dating, or before changing the date, cost, quantity or item on any earlier receipt, bill or adjustment, find out which periods it moves:

1. Save the profit and loss by month on the accrual basis, and the valuation summary at each month-end, from the earliest date the change touches to today. Intuit's QuickBooks Online article on how inventory tracking affects the balance sheet and profit and loss tells a cash-basis business to "customize the Profit & Loss report and change the accounting method to Accrual".
2. Make the change.
3. Re-run both and compare them; every month whose cost of goods sold or inventory changed has moved.

If a moved month is closed or already reported, undo the change and use the route in the next section. Intuit's QuickBooks Online lock-books article says that for transactions on or before the closing date, "QuickBooks will either give a warning or ask for a password, depending on your settings", and Intuit's article on editing closed books says an Exceptions to Closing Date report shows "any changes made after you close your books". Intuit's QuickBooks Desktop closing article says that changes made after the closing date to transactions dated on or before it appear in its Closing Date Exception Report.

How do I correct a period that is closed, reconciled or already reported?

Under the same working practice, leave the closed or reported period's transactions as they are, and record the correction in the current open period: the missing receipt, the reversal of an entry that bypassed the items, or the item-level adjustment. In its memo, name the original transaction, its date and the reason, and keep the saved before-and-after reports.

A current-period correction stops reported figures moving without a record; it does not decide whether they must be restated. The Financial Accounting Standards Board's Statement No. 154, issued in May 2005, says an error in a prior period's financial statements discovered after their issuance "shall be reported as a prior-period adjustment by restating the prior-period financial statements", and that its provisions "need not be applied to immaterial items". Whether that applies to your figures, and how a restatement is done, is a separate question, as is whether to reopen a reconciled month.

If a lender, an insurer or a tax preparer already holds the affected figures, or a return was prepared from them, then, as a working practice, tell each of them. Keep together the figure each holds, the corrected figure, the difference, and the correcting entry's date and memo, so the difference can be traced. What each is owed, and whether anything is refiled, belongs to that separate restatement question and to your preparer.

What does a diagnosis and correction look like in practice?

A shop using QuickBooks Desktop, reporting on the accrual basis that step 1 uses, reviews May on June 6. It works through the steps above:

1. Totals. The valuation summary and the balance sheet inventory account both show 3,300.00 at May 31, so nothing bypassed the items and no inactive item holds value.
2. Quantity or cost. Every item looks right except desk lamps, at -10 units and -200.00: a quantity problem in one item.
3. Detail report. The lamps' first line is a May 28 invoice for 10 lamps, costed at the Item List cost of 20.00 because none were on hand. The next is a June 4 bill for 10 lamps at 25.00, which posted a 50.00 catch-up to cost of goods sold. No line repeats, which rules out a duplicate or a double adjustment.
4. Cause. The supplier's bill is dated May 27, the day the lamps arrived, but it was entered on June 4 with that day's date. The receipt is dated after the sale it supplied.

The correction depends on whether May is still open:

In the open case, re-dating is legitimate because the supplier's own bill carries May 27; May moves, which is acceptable only because it is open and unreported, and its payables also rise by 250.00. The open-case figures are what average costing should produce; confirm them with the before-and-after check. In the closed case, May stays as reported and the June 4 bill is itself the forward correction; by June 30 the lamps show 0 units and 0.00 in both the item record and the account. Leaving the bill at June 4 does not change when the supplier is owed; set its due date from the supplier's own bill date and terms. The bill's net effect in June:

QuickBooks posts this with the bill. Do not also enter it as a journal entry: that would count it twice and post straight to the inventory account.

Either way the two months carry 250.00 of lamp cost once; only the month differs, and if they fall in different tax years, tell your preparer which month carries the cost. In the closed case the lender is told that May showed lamp inventory at -200.00 instead of 0.00, cost of goods sold 50.00 too low and payables 250.00 too low, and that June carries the correction.

What if sales post from a sales channel or point-of-sale app?

When an integration creates your sales, a fix made only in the books leaves the cause in the connector. Intuit's article on its QuickBooks Connector for WooCommerce, for example, says the connector has "two product matching options" and that with auto-sync "your account should sync every hour". Correct the product match or setting in the connector first, then the transactions it created.

If the connector sends stock levels from QuickBooks Online to the store, clear the "When Stock Levels are updated in QuickBooks Online, update stock levels in WooCommerce" option, and turn off auto-sync, before you start. Finish and verify the correction, then turn them back on. The same article says the option should be selected only if inventory levels were set up in QuickBooks Online "prior to the integration".

To confirm the fix survives, run a manual sync, which the same article says you can set up at any time. Then open the transaction you corrected and re-run the item's detail report. The correction must still be there, and no new or repeated line should appear. Intuit's connector article does not say whether the connector overwrites edits to transactions it created, so check again after the next automatic sync.

How do I check that the fix worked?

If you corrected in place, re-run steps 1 and 3 at the same date as before. If you corrected forward, re-run them at a date on or after the correcting entry (June 30 in the example); the closed month will still show the old figures, by design. The valuation summary total and the balance sheet inventory account must agree, each corrected item's detail report must show no negative running quantity from the correction's date on, and each item's quantity must match what is on hand at a value consistent with its cost. If the account agrees but an item is still wrong, the fix reached the account and not the item records, so go back to step 2.

What stops it happening again?

These routines close off the causes above:

• Enter receipts before sales. Intuit's Desktop negative-inventory article says, "Do not sell inventory items until you have purchased them and entered the purchases into QuickBooks", and suggests entering an order for stock not yet in as a sales order.
• Convert purchase orders when goods arrive. Intuit's Online negative-inventory article says QuickBooks Online counts items as inventory only after you create a bill.
• Keep the inventory account for items. Code stock purchases to items, never to the Inventory Asset account on the expenses tab, and make quantity changes through adjustments rather than journal entries.
• Close each period once it is reported. Set a closing date with a password; Intuit's Desktop closing article says a user "must know the closing date password and have the appropriate permissions" to change a transaction in a closed period.
• Repeat steps 1 and 2 at every month-end, and scan for negative quantities. Intuit's Desktop negative-inventory article says QuickBooks Enterprise 15.0 and later has a Negative Item Listing report, which "shows current negative quantities but NOT the past negative quantities". Intuit's Online negative-inventory article says the Inventory Valuation Detail report shows "a negative amount in the QTY column", and that selecting Out of Stock in Products & services shows what is out of stock.
• Maintain connector matching. Intuit's connector article expects every WooCommerce item to have a unique SKU, matched to its QuickBooks Online product's SKU field, or name field if you match by name; set this up before the product goes on sale. Because the connector asks for accounts "for non-inventoried items" when it creates new items, check that each stocked product it creates is set up as an inventory item, a check the connector article does not give.