This update clarifies the discussion on pages 117 - 120 of The QuickBooks Farm Accounting Cookbook™, Volume II, about entering sales which may cause the inventory quantity for a raised crop to go negative in QuickBooks; that is, entering sales transactions for a larger quantity than QuickBooks says you have on hand. A question has arisen about whether it is OK to do that. The answer is "it depends".

Financial effects:  different for raised inventories vs. resale inventories

The idea that you should not enter transactions which cause an inventory quantity in QuickBooks to go negative, mostly comes from the fact that selling negative inventories can cause problems or confusion with financial information when doing accrual accounting. Particularly, it can make for strange, hard-to-comprehend reporting of Cost of Goods Sold (COGS) information on profit and loss reports. (COGS is an accrual accounting concept.)

But this doesn't apply to Inventory Part Items set up for raised farm production, as described in Chapter 5 - Inventory Nuts & Bolts. With this special Item setup—specifically designed for cash basis accounting—the automatic COGS bookkeeping QuickBooks normally does when you enter the sale of an inventory Item is "discarded" (has no effect on the usual financial accounts).

However, there is a situation in which you must not sell negative inventories in QuickBooks, even as a cash basis recordkeeper. That is when entering sales of things you have purchased for resale, such as purchased feeder livestock. The QuickBooks Items you use for things you intend to resell are (should be) set up in a standard accrual-accounting manner, so their purchase cost won't be deducted as expense until they are sold. Over-selling a resale Item's inventory will result in deducting more than the resale items' purchase cost as expense ("cost of items held for resale") at tax time, and the end result could be penalties and back taxes liability if your Federal tax return is audited.

Volume III of The QuickBooks Farm Accounting Cookbook™ discusses the details of working with resale livestock and other resale items.

Why does QuickBooks warn about selling negative inventories?

QuickBooks has an optional warning message (you can turn it on/off in QuickBooks Preferences) which is displayed if you try to sell more of an Item than QuickBooks says you have on hand. Its main purpose is to alert someone who is creating an invoice or sales receipt that there may not be enough of a particular Item available to sell. It is only a warning, and does not prevent entering the sale. (Exception:  recent editions of QuickBooks Enterprise make that an option.)

Literally millions of negative inventory sales transactions have been entered in QuickBooks over the years. People in small and large businesses alike often need to enter a sale before they've had a chance to catch up on receiving inventories into QuickBooks—or in the case of raised farm production, before they've had a chance to add production to inventory, via an inventory adjustment.

In accrual accounting, selling negative inventories can cause confusing or inaccurate reporting of COGS, as mentioned above, but if those problems were significant, QuickBooks' developers would/should have changed the software to prevent them, and they haven't done that.

The bottom line:

Entering sales which result in negative QuickBooks inventories should not cause any problems for raised farm production Items which have been set up as described in this book. However, the opposite is true for resale Items. For them, negative inventories imply an accounting error which needs to be corrected.

The author,
Mark Wilsdorf