When the Item Average Cost Down to Zero…

Generally, the item cost (supposed you are using weighted average cost method) will not down to zero, but sometimes it is inevitable, e.g. your colleagues make a misc. issue with a big amount unit cost by mistake. If you are unfortunately meeting that, how about the accounting entry will be? Please see my below example, it may help you to understand it better.

Now, supposed that the item cost is 5, the quantity of this item is 10.

If you create a misc. issue with the quantity of 1 and cost of 20, then the accounting entry will be
Dr. Account 20
Cr. Inventory 20
The new updated average cost will be (50-20)/9

If you create a misc. issue with the quantity of 1 and cost of 60 (>5*10), then the accounting entry will be
Dr. Account 60
Cr. Cost Variance 10
Cr. Inventory 50
The new update average cost will be 0.

*Note that the average cost will not be under 0 forever.

If you continue to create a misc. receipt with the quantity of 1 and cost of 60, the accounting entry will NOT reverse the last one, it should be like
Dr. Inventory 60
Cr. Account 60
The new update average cost will be 60/10=6, this is just because the last cost is zero and last cost variance will not affect on this misc. receipt.

In all above accounting code,

Inventory is from your item setup (or others depending on your setup);
Account is from the accounting code you entered during misc. transactions;
Cost Variance is from your organization parameter setup like below.