Understanding how inventory transactions flow across the end-to-end supply chain in Microsoft Dynamics 365 Business Central requires tracking two critical subledgers: Inventory and Accounts Payable / Receivable.
Depending on your configuration—specifically whether Expected Cost Posting is enabled—Business Central uses interim accounts to record physical receipts and shipments before financial invoices are finalized.
Here is the complete step-by-step breakdown of General Ledger (GL) entries and subledger behaviors from Purchase Order receipt through Sales Invoice posting.
Overview of Setup GL Accounts
Business Central routes inventory and trade transactions using a matrix of setup tables:
| Account Name | Posting Setup Matrix | Account Type | Purpose |
|---|
| Inventory Account (Interim) | Inventory Posting Group | Balance Sheet (Asset) | Accrues estimated inventory asset value upon physical receipt or shipment. |
| Invt. Accrued Account (Interim) | General Posting Setup | Balance Sheet (Liability) | Goods Received Not Invoiced (GRNI) accrued liability. |
| Inventory Account | Inventory Posting Group | Balance Sheet (Asset) | Actual balance sheet valuation for inventory on hand. |
| Purchase Account | General Posting Setup | P&L (Expense) | Gross vendor purchase expense. |
| Direct Cost Applied Account | General Posting Setup | P&L (Contra-Expense) | Offsets inventory capitalization to keep net P&L impact zero upon purchasing. |
| Payables Account | Vendor Posting Group | Balance Sheet (Liability) | Accounts Payable owed to the vendor. |
| COGS Account (Interim) | General Posting Setup | P&L (Expense) | Interim cost of goods sold expense for shipped but un-invoiced goods. |
| COGS Account | General Posting Setup | P&L (Expense) | Final Cost of Goods Sold expense recognized upon sales invoice. |
| Sales Account | General Posting Setup | P&L (Revenue) | Gross sales revenue. |
| Receivables Account | Customer Posting Group | Balance Sheet (Asset) | Accounts Receivable owed by the customer. |
Phase 1: Procurement (Purchase Order to Purchase Invoice)
Step 1: Posting Goods Receipt (Physical Inbound Entry)
When the warehouse posts the Receive action on a Purchase Order, physical inventory increases.
If Expected Cost Posting to G/L is turned ON in Inventory Setup, Business Central posts interim financial entries to record the Goods Received Not Invoiced (GRNI) liability.
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| Physical Receipt
├── Subledger: Item Ledger Entry (+Qty) & Value Entry (Expected)
└── General Ledger: Interim Inventory Asset (Dr) / GRNI Liability (Cr)
|
Subledger Impact
- Item Ledger Entry: Increases quantity on hand.
- Value Entry: Created with
Expected Cost = Yes.
General Ledger Entries
| Debit / Credit | GL Account Setup | Account Description | Normal Account Nature |
|---|
| Debit | Inventory Account (Interim) | Accrues estimated physical stock asset | Asset (Balance Sheet) |
| Credit | Invt. Accrued Account (Interim) | Accrues GRNI liability | Liability (Balance Sheet) |
Note: If Expected Cost Posting is turned off, only the subledger Item Ledger Entry is created. GL posting is deferred until the purchase invoice is posted.
Step 2: Posting Purchase Invoice (Financial Inbound Entry)
When Accounts Payable posts the Invoice, Business Central reverses the interim expected cost entries and posts the actual purchase transaction and vendor liability.
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| Purchase Invoice Posted
├── Step 2A: Reversal of Interim Receipt Entries (Expected Cost)
└── Step 2B: Actual Financial Invoice & Inventory Capitalization
|
Step 2A: Reversal of Interim Entries
Reverses the expected entries recorded during receipt.
| Debit / Credit | GL Account Setup | Account Description |
|---|
| Debit | Invt. Accrued Account (Interim) | Reverses GRNI accrued liability |
| Credit | Inventory Account (Interim) | Reverses estimated physical asset |
Step 2B: Actual Financial Posting
| Debit / Credit | Account Type | GL Account Setup | Description |
|---|
| Debit | P&L Expense | Purchase Account | Gross invoiced item purchase amount |
| Debit | Asset/Liability | Purchase Tax / VAT | Input tax claim (if applicable) |
| Credit | Liability | Accounts Payable | Total liability owed to the vendor |
| Debit | Asset | Inventory Account | Final balance sheet inventory asset |
| Credit | Contra-P&L | Direct Cost Applied Account | Offsets inventory capitalization |
Why Business Central Uses Purchase Account vs. Direct Cost Applied
On a purchase invoice, Business Central generates a 4-way posting in the General Ledger:
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| INCOME STATEMENT (P&L)
┌──────────────────────────────────────────────────────────────────┐
│ Purchase Account (Debit) : +$1,000.00 │
│ Direct Cost Applied Account (Credit): -$1,000.00 │
│ ─────────── │
│ Net P&L Impact : $0.00 │
└──────────────────────────────────────────────────────────────────┘
|
- Net Zero P&L Impact: The Purchase Account (Debit) and Direct Cost Applied Account (Credit) offset each other on the Income Statement ($0.00 net impact).
- Capitalization: The asset value is shifted directly onto the Balance Sheet (
Inventory Account) until the inventory is sold. - Purchasing Volume Tracking: Controllers can monitor total vendor purchasing volume in the Purchase Account without skewing current-period net expenses.
Phase 2: Sales (Sales Order to Sales Invoice)
Step 3: Posting Sales Shipment (Physical Outbound Entry)
When shipping items against a Sales Order, physical inventory decreases.
If Expected Cost Posting to G/L is turned ON, Business Central posts interim Cost of Goods Sold (COGS) and reduces interim inventory.
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| Physical Shipment
├── Subledger: Item Ledger Entry (-Qty) & Value Entry (Expected)
└── General Ledger: Interim COGS (Dr) / Interim Inventory Asset (Cr)
|
Subledger Impact
- Item Ledger Entry: Decreases physical stock on hand.
- Value Entry: Created with
Expected Cost = Yes.
General Ledger Entries
| Debit / Credit | GL Account Setup | Account Description | Normal Account Nature |
|---|
| Debit | COGS Account (Interim) | Interim expense for shipped stock | Expense (P&L) |
| Credit | Inventory Account (Interim) | Accrues reduction in physical stock | Asset (Balance Sheet) |
Step 4: Posting Sales Invoice (Financial Outbound Entry)
When the Sales Invoice is posted, Business Central performs two operations:
- Reversal of interim shipment entries.
- Recognition of revenue, customer receivables, sales taxes, and final COGS expense.
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| Sales Invoice Posted
├── Step 4A: Reversal of Interim Shipment Entries (Expected Cost)
└── Step 4B: Revenue, Receivables & Final COGS Recognition
|
Step 4A: Reversal of Interim Entries
| Debit / Credit | GL Account Setup | Account Description |
|---|
| Debit | Inventory Account (Interim) | Reverses interim inventory reduction |
| Credit | COGS Account (Interim) | Reverses interim COGS expense |
Step 4B: Revenue & Customer Receivables Posting
| Debit / Credit | Account Type | GL Account Setup | Description |
|---|
| Debit | Asset | Accounts Receivable | Total amount billed to customer |
| Credit | Revenue | Sales Account | Gross sales revenue recognized |
| Credit | Liability | Sales Tax / VAT Payable | Output tax collected (if applicable) |
Step 4C: Final Cost Recognition (Inventory to COGS)
| Debit / Credit | Account Type | GL Account Setup | Description |
|---|
| Debit | Expense | COGS Account | Final Cost of Goods Sold expense |
| Credit | Asset | Inventory Account | Permanent reduction of inventory asset |
Complete End-to-End Transaction Summary
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| ========================================================================
1. INBOUND (PURCHASE ORDER)
========================================================================
Goods Receipt:
(Dr) Inventory Account (Interim)
(Cr) Invt. Accrued Account (Interim) [GRNI]
Purchase Invoice:
(Cr) Inventory Account (Interim) [Reversal]
(Dr) Invt. Accrued Account (Interim) [Reversal]
(Dr) Purchase Account
(Cr) Accounts Payable
(Dr) Inventory Account
(Cr) Direct Cost Applied Account
========================================================================
2. OUTBOUND (SALES ORDER)
========================================================================
Goods Shipment:
(Dr) COGS Account (Interim)
(Cr) Inventory Account (Interim)
Sales Invoice:
(Cr) COGS Account (Interim) [Reversal]
(Dr) Inventory Account (Interim) [Reversal]
(Dr) Accounts Receivable
(Cr) Sales Account
(Dr) COGS Account
(Cr) Inventory Account
========================================================================
|