Sometimes businesses agree to sell goods before they actually have them. Consequently, when you use an inventory system that stores stock as an asset, this poses a problem because the effect can be negative inventory. Drop shipping, eBay sales, and pre-ordering can all lead to this situation.
If your transaction practices follow a fairly standard process in day-to-day commerce, it shouldn’t ever be an issue. If you try to create a sale for goods you don’t have yet, most accounting systems will stop you, as does Saasu. It does this because it expects a different workflow.
Accounting systems expect a sales order first, and to see that change to a sale later when a trigger occurs for you to change its status. In Saasu, this is the first drop down in the Add/Edit Sale screen. Changing a Sales Order to a Sale moves any deposit to income and accounts for Sales/GST/VAT tax to be payable.
For example, the trigger could be the receipt of goods from the supplier or the delivery of goods to your customer. It depends on your workflow and accounting procedures, and how they relate to laws and regulations regarding ownership and transfer of ownership in your tax zone.
In Saasu you can only run negative inventory (other than the approach mentioned above) if your inventory items are set to Buy and Sell, and do not tick Include this item in my Balance Sheet (inventoried) . You can only untick this at the setup stage of the item and not after transactions have been entered.
An inventory system can’t operate on negative inventory because it would send Asset: Stock account into a negative balance, which the accounting profession doesn’t like. Consequently, some people don’t run inventory as assets but instead they trade their stock through Income and Expense account Buy and Sell options only). Again, this is a different accounting/tax method, so check with your accountant before making these decisions.
Negative Current Value Errors
Sometimes editing a transaction associated with an inventory item might not be allowed in Saasu.
Example of a situation where Saasu will tell you:
What causes this example is as follows:
- Start with no Bottle-White in stock (average cost is $0).
- Buy 20 x Bottle-White for $300 (average cost is now $300).
- Sell 20 x Bottle-White for $500 (average costs $0 again now because we have no widgets left and have booked $500 cost of sale and profit to the accounts with journals in our business logic layer).
At a later date, you want to update the invoice at step 2. to a total value of $450 changes the current value to -$136.36.
Why can’t Saasu just allow me to change this and accept the negative value
Saasu can’t allow negative inventory values because this doesn’t make financial/accounting sense in a perpetual inventory system. If we allowed this and ignored the accounting logic, we would need to remove and add back all the more recent transactions in the correct order. This would create new Income and Cost of Goods sold entries in the ledger for all those transactions. In other words, we might upset the integrity of the accounting and tax reporting if, for example, commissions, P & Ls, or tax remittances based on this data had since been executed on.
Can I force this in? I don’t mind that the accounts are affected.
Yes, you can following one of these approaches:
- Save the original sale on your computer, then delete the sale invoice at step 3. ahead of that purchase in time (as you will need to reference this).
- Adjust the purchase to the new numbers you have, in our case we want to update it to $450.
- Re-enter the sales you removed earlier at step 1.
- Enter a separate transaction to capture that $136.36 value as a journal or another purchase transaction which you note to be an adjustment. You aren’t booking this against that widget.
Case Study Example
Unable to complete the requested operation as it will cause zero stock-on-hand and non-zero current value for ITEMABC (Current value will become: -$108.92).
When you encounter an error like the one above, the first thing you should do, is look up ITEMABC in Item>Items, and find the current value: $656.08.
Now what the error is telling you is this:
If you remove this invoice, Saasu will deduct $765 from the system, however the current value is only $656.08. This means that inventory will go into negative by -$108.92 (765 – 656.08 = 108.92), and Saasu will not allow you to do this.
In order for you to continue making the changes, you need to update the ‘Amount’ field of your invoice from: $765 to $656.08 THEN, you must hit SAVE first.
After you have saved the new dollar value, now try to delete the invoice.
Important Note: You should only attempt this where by updating/deleting the item from the invoice, you are depleting the stock on hand for this item COMPLETELY, taking it to 0 on hand, 0 current value, 0 average cost. If you are uncertain about these calculations, or are trying to update figures for current stock, please speak with your Accountant before attempting any changes.