Your opening statement indicated the problem. When you are using average costing you should never allow inventory to go negative. The average costing is working properly. A negative number throws out the calculations and it does not recover when the inventory is back on the positive side. This is just mathematics and not a program error. After many years of knowing this happens, the next release of Sage 50 (19.3) will have a method to record inventory received before the invoice is received. When the invoice is recorded at a later date the average costing should be good as the inventory should not go negative. The quick way to correct the situation is to turn off the ability to have negative inventory.

To correct your account balance you will have to enter an inventory adjustment at the current average and re-enter at the proper average from a manual calculation. 

Thank you so much for your reply Alwyn.  I inherited the mess, but hoping to fix.  Thank you for your suggestion to correct.  I look forward the the next release.

Alwyn said:

The quick way to correct the situation is to turn off the ability to have negative inventory.

Switching to FIFO will also help, if you can (check with your Accountant).  But ultimately it's best to disable Negative Inventory and strictly record the purchase, before recording the sale.  It's the only way to keep calculation of cost-of-goods-sold up to date.

Alwyn said:

After many years of knowing this happens, the next release of Sage 50 (19.3) will have a method to record inventory received before the invoice is received.

This will be a welcome improvement, and will save a lot of time.

It's always been possible to record receipt of inventory with a 'reference', then adjusting the 'reference' to an invoice after receiving the invoice.  But it was kludgy (three inventory transaction records for one purchase), and we have since been able to convince most of our suppliers to invoice us electronically to get us the invoice ahead of the goods. 

I inherited the mess too (over 10,000 items, 2,000 duplicates, 1,000 at a negative quantity, no bin locations, etc.) Even the kludgy work-around was better than fixing the inventory COGS wrecks that allowing negative inventory caused. 

I would fire any client who insisted on using negative inventory.  Or bill strictly by the hour.