Let’s talk about a common (and seriously frustrating) issue small business owners face when reconciling their books—negative cost of goods sold (COGS).
If you’re scratching your head wondering why your profit and loss report says you made more money than seems even remotely possible, or if your accountant is sending you cryptic messages about inventory discrepancies, you might be dealing with a COGS problem. A negative one. And yes, it’s just as bad as it sounds.
So… What Even Is Negative COGS?
Cost of goods sold represents the direct costs of producing the products you sell. Think materials, labor, and manufacturing expenses. A negative COGS essentially means your books are saying you made money by selling your products… without spending anything to produce them. Worse still, they might even say you got paid just for having inventory magically vanish. 🧙♂️✨
It’s not just bizarre, it’s a red flag for deeper issues.
How Does This Happen?
There are a few common culprits behind negative COGS, especially when you’re using inventory tracking in QuickBooks or similar accounting software:
- Incorrect Inventory Entries: Maybe a product was sold before it was received into inventory. If QuickBooks can’t match a sale to inventory on hand, it can assign a cost of zero—or worse, a negative number.
- Duplicate Transactions: You might be recording purchases twice or miscategorizing them. That throws off the balance between what’s coming in and going out.
- Manual Adjustments Gone Rogue: Ever made a quick inventory adjustment because “it looked wrong”? One bad manual fix can snowball into financial nonsense.
- Wrong Items on Sales Receipts or Invoices: If you sell an item not set up properly as an inventory item (or sell it under the wrong product/service), QuickBooks may not deduct it from inventory correctly.
- Disconnected Systems: Using different platforms for inventory, sales, and accounting? If they don’t sync properly, your numbers won’t either.
Why It Matters
Besides giving you a totally distorted view of your profitability, a negative COGS messes with your taxes. Overstated profits can lead to overpaying Uncle Sam. And let’s not even get into the confusion it creates when you’re trying to make smart business decisions based on broken data.
How to Fix It
Getting back on track usually means rolling up your sleeves and digging into the details:
- Reconcile Inventory Regularly: Make sure your inventory list matches what’s actually in stock and what’s been sold.
- Check Item Setups: Ensure every item sold is set up correctly as an inventory part with a proper cost and income account.
- Review Transaction Dates: Watch for products sold before they were received or recorded in inventory.
- Audit Adjustments: Keep manual adjustments to a minimum and document why you’re making them.
If all of that sounds overwhelming, you’re not alone.
Here’s the Fix You Actually Need: Hire a Certified QuickBooks ProAdvisor
A Certified QuickBooks ProAdvisor isn’t just someone who knows the software—they’re trained and tested to help business owners like you clean up, catch up, and level up. They know how to trace the weird stuff, correct errors without making more of them, and set your books up to avoid these kinds of issues in the first place.
Your time is better spent running your business—not untangling accounting mysteries.
Ready to say goodbye to negative COGS and hello to accurate, stress-free books?
Get a free consultation from Windsor Solutions today and get your financials working for you, not against you.
