Negative On-hand Stock

No, you can’t. You cannot have negative on-hand stock, as the minimum quantity of a product is zero. However, negative stock is a common issue at year-end, and auditors will often question it.

What Is Inventory?

Inventory comprises the goods (stock) you have acquired for sale or for use in production, including raw materials, work-in-progress, and finished goods.

On-hand stock refers to the physical quantity of inventory you have on the shelf, ready to sell or use in manufacturing. Therefore, you cannot sell or use it in production when your on-hand stock is already zero. If zero (0) is the minimum quantity, how can the quantity fall into negative numbers?

How Can Your On-hand Stock Be Negative?

From the above, we know that physical on-hand stock can never fall below zero. So why does our accounting or inventory system sometimes show a negative on-hand stock value?

There are many reasons why the on-hand stock in the system may drop below zero. The most common causes are:

• Timing discrepancies

• Data entry errors

Timing Discrepancies

Timing discrepancies mainly stem from issues with transaction dates. In other words, the accountant might have recorded and dated the sales invoice before the corresponding purchase invoice (vendor invoice).

For example, Elaine, the accountant at a trading company, received an order from ABC Company. She noticed that a shipment was imminent and issued a sales invoice to ABC Company for the goods. When the goods arrived a few days later, she entered the vendor invoice into the system and arranged the shipment to the customer.

Assuming the on-hand stock is zero, and she recorded the sales invoice at the end of December, the stock will show a negative quantity. Although the stock returns to zero when the goods arrive in early January, the December reports will remain inaccurate (showing negative stock), which may attract the auditor’s attention.

One thing to note is that a negative stock may not be an error, but rather a management decision to invoice the customer in full for the goods.

Let’s say Elaine’s company does not keep stock, and goods fulfilment is on a back-to-back basis with the supplier. Because it is a back-to-back order, the company may want to collect a deposit from the customer before placing an order with the supplier. In this case, Elaine could issue a sales invoice to the customer for the goods they wish to purchase. As a result, a negative quantity will appear in Elaine’s inventory system.

It’s not a mistake (to a layperson), since Elaine knows what she is doing, but the workflow has caused negative on-hand stock. The workflow:

• Order received from the customer.

• Enter a sales invoice for the products to collect a deposit (negative on-hand stock).

• A few months later, upon receipt of goods, enter a vendor invoice (stock quantity returns to zero).

Although the quantity has returned to zero, the sales and vendor invoice dates are several months apart.

Data Entry Errors

Using the wrong short date format is a common data entry mistake, especially on a newly set-up computer. The IT team may forget to change the short date format to DD/MM/YYYY and leave it as MM/DD/YYYY (or vice versa).

For example, Elaine entered a sales invoice date of 4/12/2025, which she intended as 4 December 2025. Unaware of the MM/DD/YYYY short date setting on her new computer, the inventory system (or accounting system) recorded it as 12 April 2025.

Another common error is selecting an incorrect product when invoicing the customer. Instead of product A, she might have chosen product B, causing the stock quantity for product B to fall below zero.

Other Causes

Other Causes Besides timing discrepancies and data entry errors, negative stock can also be caused by:

• Processing issues: The products arrived physically but were delayed or not recorded in the system. As a result, the system isn’t aware that the inventory is available.

• Return stock not recorded: The goods were not registered in the system when the customer returned the product. The physical quantity increases, but is not reflected in the system.

• Losing track of different locations: In multi-location warehouses, if the user picks the product for the invoice from Location A but the physical stock is in Location B, the system will show a negative quantity for Location A, even though the total company stock remains positive.

Accounting Impact of Negative Stock

Goods are assets. When goods are purchased, the inventory account on the Balance Sheet is debited. Accounts payable or the bank account is credited, depending on whether you record the transaction on an accrual or cash basis. When you sell the product, the accounting system transfers the product’s cost from the Balance Sheet to the Profit and Loss statement. The journal for the sales invoice is:

Debit Accounts Receivable (or Bank account if it is a cash basis)

Debit Cost of Goods Sold

Credit Sales

Credit Goods and Services Tax (GST), if applicable.

Credit Inventory Assets

Negative stock will affect stock valuation and cost of goods sold. It may record the historical cost rather than the current cost, or it may record a zero cost of goods if it is new and has no purchase history.

Assuming product A is a new item with no purchase history or historical cost recorded in your accounting or inventory system. When you enter the sales invoice, it will only debit the accounts receivable and credit the sales account. This process will lead to overstated revenue and understated cost of goods sold. Any commission for the salesperson will be inaccurate if you base it on the product margin.

Why Does Some Accounting Software Allow Negative On-hand Stock?

While tightening the accounting workflow—such as requiring entry posting and locking accounts to prevent unauthorised or fraudulent entries—the system must sometimes provide flexibility to accommodate management workflows (to meet users’ preferences), such as invoicing in advance to collect customer deposits or for customs clearance.

This flexibility allows the sales team to invoice the customer while waiting for the store or payable team to enter the vendor invoice and update the on-hand stock.

Sometimes, it is challenging to balance control and flexibility.

How to Avoid a Negative Stock Issue

Use Sales Orders Instead of Sales Invoices

A sales order is a non-posting entry. Unlike a sales invoice, a sales order will not impact your accounts.

If your accounting system includes a sales order module, utilise it to prepare a pro forma invoice (listing all products) for customs clearance. The benefit of using a sales order is that it appears in the inventory report, prompting management to review the available on-hand stock (current stock minus sales orders plus purchase orders).

Besides using a sales order for customs clearance, you can also use it to collect deposits or advances from the customer. The MoneyWorks accounting system enables users to process sales orders and receive customer deposits.

Let’s say Elaine is using the MoneyWorks accounting system. She enters the customer order into the sales order module and sends it to the customer to collect an advance payment. She then processes the sales order for “Receiving deposit for order” when the customer has paid. The process debits the bank and credits the customer’s advance payment account (a current liability account in the Balance Sheet).

When the goods arrive, and she is ready to invoice the customer, she can convert the sales order into a sales invoice by using the “Ship goods with invoice” process in the MoneyWorks sales order module. The MoneyWorks accounting system will transfer the advances collected from the customer to the sales invoice. The journals behind the sales invoice are:

Debit Accounts Receivable

Credit Sales

Credit GST Output (if applicable)

Debit Cost of Goods Sold

Credit Inventory

Debit Customer’s Advance Payment

Credit Accounts Receivable

Using the sales order instead of the sales invoice prevents negative on-hand stock and overstated revenue. This approach keeps the inventory system clean and accurate.

What If the Customer Insists on Receiving a Sales Invoice?

If you are not going to use the sales order system, or the customer insists on receiving a sales invoice, you may issue a sales invoice to request a deposit and keep the invoice unposted.

An unposted invoice will not update the ledger, but it allows the user to print it for the customer to collect a deposit. The inventory will not be updated until the invoice is posted.

A Better Option

Alternatively, instead of issuing an invoice for products, charge it to customer advances. In this case, the invoice will debit accounts receivable and credit the customer’s advance payment. You would then transfer the deposit to reduce the amount owing from the customer—either by netting it off against the invoice itself or by creating an internal “credit note” to reduce the balance owing.

Summary

Managing inventory is never a simple task. You need to monitor both the accounting and management workflow and frequently check the on-hand stock and its value to maintain inventory integrity.

Whichever method you are using, check with your accountant to ensure compliance with applicable accounting standards and regulations.