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Understand inventory posting

Business Central posting groups are codes to link inventory transactions to entries in the general ledger. In this post, I explain how inventory posting works in Business Central and the setup you need to get the correct entries in your company books if you purchase and sell inventory.


Inventory Posting Setup page

Inventory Posting in Business Central Explained

Unlike most ERPs in the market, Business Central has a unique way of handling inventory cost posting that allows users to record additional costs when purchasing inventory.


Purchase of inventory using simple accounting software results in two transactions:

  • Dr Inventory

  • Cr Accounts Payables

The same transaction in Business Central will result in four transactions:

  • Dr Inventory

  • Cr Direct Cost Applied

  • Dr Purchase

  • Cr Accounts Payables

This logic allows you to apply overheads when purchasing inventory so that the value of the inventory received is higher than the amount posted in AP, as you can see in the example below.


Most companies use the same general ledger code for the Purchase and the Direct Cost Applied entries, so these will wash when no overheads are applied.


What is Expected Cost Posting in Business Central?

Another exciting feature in Business Central is the ability to post expected inventory costs when receiving items. You can enable expected cost posting on the inventory setup page.


Inventory Setup page

Expected cost posting works in a simple way and does not generate the four entries of the actual cost posting. You can also set expected cost posting to use a different inventory account in Business Central because the posting generates the following two entries:

  • Dr Inventory Interim

  • Cr Inventory Accrual (Interim), Also called Goods Received Not Invoiced - GRNI

The expected cost entries will be reversed when you post the purchase invoice and the actual costs are realised. Likewise, when you ship a sales document without an invoice, the expected cost posting will use an Interim COGS.


General Ledger Entries page

The Posting Groups Required to Work with Items

There are two sets of posting groups required to register inventory costs. The inventory and the general product posting groups.


Inventory Posting Groups

Inventory posting groups are used in the inventory setup page and primarily for balance sheet accounts. Inventory posting groups determine the accounts used when posting inventory transactions. As such, the combination of an item's inventory posting group and the location code on the document line will determine which general ledger code balance to update on posting. The example below shows the inventory setup in my sandbox with the inventory and the inventory interim accounts highlighted.


Inventory Posting Setup page

General Product Posting Groups

General product posting groups are used in the general posting setup and are typically used for income statement accounts. The combination of this field's value and the general business posting group on a document line determines which general ledger balance to update on posting. In the example below, you can see the Purchase and the Direct Cost Applied fields for Domestic and Retail.


General Posting Setup page

Posting Setup recommended

I don't typically advise my clients to use a specific setup for inventory posting because it mostly depends on the company's chart of accounts and requirements from local tax authorities. However, there are general rules that I recommend to my clients.


  • Create separate balance sheet accounts if you use expected cost posting. One is for the inventory, and the other is for the interim. Same for the COGS accounts

  • Consider if you need different general product posting groups or inventory posting groups. Most companies don't need more than one or two posting groups.

  • Avoid setting up the Purchase and the Direct Costs Applied to a balance sheet account. These two accounts should be from the income statement and can be one account even if you use overheads applied.


In Summary

Business Central lets you record additional costs like overheads and landed costs when purchasing and selling inventory. However, it also requires careful planning and configuration of the posting groups and the general ledger accounts. If you have any questions or need help with inventory posting in Business Central, feel free to contact me or leave a comment below.


Regards

Alfredo

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