Sage 50 will let you sell more stock than it shows as on hand.  But have you ever wondered how cost of goods sold is calculated for those sales?  And have you ever seen entries in your general ledger with the description “Syscost Adjustment” and wondered where they came from?  Let’s look at what happens when you let your inventory go into the negative.

Let’s say you have been buying widgets for $100 each.  You get an order for 5 widgets. Sage 50 says you have 4 on hand, but you know more are coming so you enter the invoice and tell the customer they will be delivered in a few days.  Now your inventory shows -1 on hand. Since Sage 50/Peachtree has no way of knowing differently, it assumes that when you replenish this item the cost will be the same as the last time you purchased it.  So in this case, COGS for the fifth widget would be $100, just like each of the other 4 units.  If you look at the Inventory Valuation Report, you will see -1 widgets on hand with a value of -$100.

If the new widgets also cost $100 each, the cost of goods sold entry will be unchanged and there will be no real affect to letting your inventory go negative.

If the new widgets cost $105, and you record their purchase on the same date as the sales invoice (or earlier) the cost of goods sold for the 5th widget will be changed to $105.  All of your reports will look the same as they would if you had originally had 4 on hand at $100 and 1 at $105.

If the new widgets cost $105, and the purchase is dated after the sales invoice, a System Cost Adjustment, (or Syscost Adjustment in older versions of Peachtree), will be made that debits COGS and credits Inventory for $5.  This entry keeps the general ledger in line with the Inventory Valuation Report and corrects your total COGS on the income statement.  But the cost adjustment does not get linked back to the sale.  So if you look at the Items Sold To Customers report you will see that the COGS still shows $500, not $505.  The same is true of the Item Profitability Report.  And the Item Costing Report will show the $5 in the Adjust column, not Cost of Sales.

It’s up to you to decide if this is a problem.  If you closely monitor profitability by item, or you pay commissions based on profit instead of total sales, you probably should not allow your inventory to become negative.  Although, even then it would depend on how much your costs change.

If you use average costing, Sage 50 won’t always use last cost in negative inventory situations.  If you bought one widget for $100 and another for $110, you would have 2 on hand with an average cost of $105.  If you sell 3 widgets on one invoice, Sage 50 would assume the same cost of $105 each for all three units.  But if you sold 2 on one invoice, bringing your QOH to 0, and then sold another widget on a separate invoice, Sage 50 would use your last cost ($110) as the COGS amount for that invoice.  But system cost adjustments work the same way and have the same effect on reporting regardless of your costing method.