Dynamics 365 Business Central: Item Costing, part 2

Dynamics 365 Business Central: Item Costing, part 2

Okay, we're going to keep going on costing.

This is a second video on that. Before we did receive, not invoice, and then receive an invoice for the invoice part of it.

I'm going to dig a little bit deeper into the invoicing part of the transaction.

Last time we had an item, it was the spring coffee mug, and we received it.

In the chart of accounts, basically there was a purchase invoice created. There was one ILE created, which is the item ledger entries.

There were two value entries. One was for the receipt and one was for the actual invoice. It happens one after another.

Then there is a GL entry, which is the accounting. There are four GL entries created. Which seem like a lot.

I want to dive into this number.

Why are there four GL entries created when you receive a product?

What happens when you receive a product?

We're going T accounts a little bit. We have the inventory account and we have AP, accounts payable. When we receive a product and post the invoice, let's say for $1000. We receive $1000 and we owe $1,000 to the vendor.

That should be it right? But it's not!

In the test company, there's actually two extra postings that happen in all companies. But in the test company they are all directed towards the inventory account and you don't see them because they wash.

If you're just running around in the test company this is all you'll see. But if you drill into the inventory account you see there are three transactions.

Two of them washed. One of them hangs. 

What are these two extra transactions about?

They are something called direct cost applied and purchases.

The offset to the inventory account in Business Central is not AP.

The offset to the inventory account in Business Central is the direct cost applied. And the opposite to the AP account, again, is not inventory. The offset to the AP account is purchases.

These two bookings are done, as well as these two. In the test you only see this because both of these are directed to be posted into the inventory account, by setup. Which is a little misleading.

There is a possibility that these numbers do not match, do not wash. We'll introduce a fifth account (and that's what I'm going to get into in a video after this), but I'm going to show you in the system how it posts so that we can actually open up these four amounts and understand what this is.

This is a little deep, but hey, got to have a little fun with this, right? 

Let's check it out in the system

Okay, let's take a look at this. I'm going to go into my item and take a look at the transaction that happened during our last posting.

If I go into history, entries, ledger entries, I actually have to drill into the cost amount, and go into the invoice, which is right here.

I can hit navigate, it collects all of the entries that got created when I posted this invoice.

We created a posted purchase invoice, 4 GL entries, vendor ledger entry. 2 of them actually. One for detailed and one for the actual. Then a value entry, which is the entry I am navigating on.

The GL entry, if I look at those, why are we generating 4 GL entries? Right?

That's exactly what I explained on the whiteboard. We basically got 3 extra entries here. We get 1 entry for the vendor, 1 entry into the inventory, and 2 entries into direct cost applied and purchases.

Let me go ahead and post again and this will make it a little bit clearer.

If I go into the chart of accounts, I have created extra accounts. I created the purchases account and direct cost applied account. Then I have the inventory account.

I also went into the general posting setup. For this item, which is this line that I've set up so that the purchase account is going into a different account than the inventory account, in demo,

It's actually all going into the inventory account, but it washes out most of the time. You don't really understand or know whether it's happening, other than it creates extra entries.

I have this going into purchase account and over here I have the direct cost applied account.

if I go ahead and post a purchase order for spring, to Fabrikam, a popular vendor, for the spring coffee mug into the main location. Let's say we get 500.

I'm going to just put in the invoice number, and go ahead and post.

Let's see what happens. Receive an invoice. Now it booked.

If we go into the chart of accounts, you can see that t's posting 2500 on purchases and 2500 on direct cost applied. It's hitting debit purchases and credit direct cost applied. Direct cost applied is the offset to inventory and the purchases is the offset to AP.

Why do we need these offsets?

Why doesn't it just post debit inventory and credit AP?

Hopefully, on the blackboard I explained a little bit, and in the next video we're going to actually throw these numbers off to show you how that can be done.