When inventory is allowed to be sold or consumed so that the on-hand quantity is below zero it means that the item is potentially sold to the customer at the the wrong cost.
Let’s look at this example.
Average Cost $100
On-Hand negative 2
Replacement cost $110.
We see on this sales order that the cost is $100, the margin is 31.03% and the on-hand is -2.
If we would have had received the quantity into stock previous to selling it the cost would have been $12 instead of $10. This means that the sale was posted to the customer and to the GL at the wrong cost.
The sales history cannot be changed, however to maintain correct GL costing and to keep the GL balanced to the inventory Spire does correct the costing when the items are received.
Notice that the $20 difference was posted to cost of goods like it would have if the item was received before invoicing it to the customer and therefore pushing it to negative on-hand..In the end, the correct amount of $120 was posted to cost of goods.