Negative inventory occurs when the actual inventory is less than what is recorded in the computer system, often due to errors or miscounting. It can lead to poor record keeping and difficulties in inventory control, but is not necessarily disastrous for a business.
Negative inventory is typically the result of a difference between the actual on-hand inventory and the virtual inventory tracked and calculated by a computer system. This usually occurs when an error has occurred or systems have not been updated properly and indicates that products have been sold or transferred that they should not have been. Inventory issues can also arise when products are lost, then the inventory is adjusted to remove the lost products, and then they are found without re-adjusting the inventory.
The term may initially seem like a contradiction, as it implies that a company may have less than zero of a product, but it is a reasonable consequence of inventory management. It basically indicates that a company has been selling products that are not actually there or has been selling products that were not part of the inventory record. This can occur due to communication errors between systems. If a manufacturing company sold an item before it was made, the inventory system may show negative inventory until the product is made and the count is corrected.
Negative inventory can also occur as a result of miscounting inventory or taking products from the wrong location in a business. If counts available on a computer indicate that a store should have 12 of a particular item, but an employee is unable to actually find those 12 items, they could be subtracted from the store’s inventory. This is generally assumed to have been caused by some form of shrinkage and could be related to poor receiving practices or theft. If all 12 items are found and placed on the shelf for sale, without affecting the store’s inventory, their sale can create negative inventory for that store.
While negative inventory isn’t necessarily disastrous for a business, it can lead to poor record keeping and make inventory control more difficult. The store in the example above has lost profits, due to the item not being on the shelf, and may end up with too much product as new items are shipped to the store and the missing items are found. The situation can also arise if a business incorrectly tracks the same item to multiple locations. If there are 50 items in location A and 100 items in location B, for example, 100 sales in location B that are incorrectly documented as coming from location A would create negative inventory in location A.
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