Because inventory is composed of physical product units that occupy either shelf space or storage space, it may seem impossible to have a negative balance of inventory. However, in inventory management where inventory is closely tracked using computer systems and accounting methods, mistakes in the process can actually cause a negative inventory balance. These issues must be corrected for inventory management to work correctly, which means narrowing down the negative balance to a single cause.
A negative balance resulting from a location difference is caused when a company accidentally ships or records the product to the wrong warehouse or store. This leads to products remaining in one storage place while being shipped from another storage place, when in reality the reverse happened -- but company records show otherwise. This leads to an excess of recorded products in one place and a negative balance in another area. This can also occur when wrong numbers are recorded for transferred inventory.
The production process can be very complex when it comes to recording. Byproducts, scrap amounts, batch numbers and production statistics must also be properly tallied. A mistake, duplication transaction or misunderstanding of an invoice can actually show that more inventory should have been produced than actually was, creating a ghost inventory and a negative balance that is resolved when the mistake is found.
Timing is one of the most simple types of negative inventory balances. When new inventory is ordered, the shipment of the inventory may be recorded as complete before the inventory is even out of production, leading to a negative balance. This is the result of an delay in processing, not an error, and should be corrected with time.
Considerations for Adjustments
Adjusting inventory to take care of negative balances can be difficult. When it comes to timing issues, adjusting inventory will actually create a new problem when transactions are completed and the inventory numbers are suddenly too high. Adjusting for a location-based difference can solve the book problem, but the business must double-check to see if products have been physically transferred to the right locations. In production, an adjustment will not solve the organizational errors that created the miscalculation in the first place.
- InventoryOps: Negative Inventory: What you don't know may make things worse
- Masao Nakamura, Sadao Sakakibara and Roger Schroeder. "Adoption of Just-in-Time Manufacturing Methods at U.S.- and Japanese-Owned Plants: Some Empirical Evidence," pages 230-231. IEEE Transactions on Engineering Management, 1988.
- Electronic Code of Federal Regulations. "Regulation S-X, 17 CFR Part 210: Sec. 210.5-02 Balance sheets." Accessed Aug. 1, 2020.
Tyler Lacoma has worked as a writer and editor for several years after graduating from George Fox University with a degree in business management and writing/literature. He works on business and technology topics for clients such as Obsessable, EBSCO, Drop.io, The TAC Group, Anaxos, Dynamic Page Solutions and others, specializing in ecology, marketing and modern trends.