Procurement – Inventory accounting in Microsoft Dynamics 365 for FinOps

Procurement is one of the most important business processes in any industry, whether manufacturing, retail, trading, or service. Microsoft Dynamics 365 for Finance and SCM supports a very robust procurement process right from Purchase requisitions, Request for quotations (RFQ), Entering RFQ replies, RFQ comparison.

In this blog post, we will go through the following points. The focus of the post is basically from the accounting and financial perspective.

• Create an Item group
• Create main accounts which will be used for setting up Inventory posting profile and Vendor posting profile.
• Setup Inventory posting profile for Purchase order transactions
• Procurement of stocked product
  • Creating a stocked product
  • Generate a Purchase order
  • Post product receipt
  • Analyze accounting impact of Product receipt
  • Post purchase invoice
  • Analyze accounting impact of Purchase invoice
• Procurement of non-stocked product
  • Creating a non-stocked product
  • Generate a Purchase order for non-stocked product
  • Post product receipt
  • Analyze accounting impact of Product receipt
  • Post purchase invoice
  • Analyze accounting impact of Purchase invoice

Create Item group

Create an Item group called RM – Raw materials. Find more details on creating an Item group.

Create Main accounts

Create the following set of main accounts and keep Do not allow manual entry selected to avoid manual entry General journal posting into the main accounts.

Main account	Name	Main account type	Do not allow manual entry
191001	Raw material inventory	Asset	Yes
450001	Purchase expenditure, un-invoiced	Expense	Yes
260001	Raw material accrued liability	Liability	Yes
450002	Raw material purchase expenditure	Expense	Yes
460001	Raw material purchase expenses	Expense	Yes

Posting profile for Purchase order transactions

1. Navigate to Cost management >> Ledger integration policies setup >> Posting or Inventory management >> Setup >> Posting >> Posting to define inventory posting profile for Purchase order transactions for item group RM – Raw material
2. Click Purchase order tab
3. Select Cost of purchased materials received from the left pane and then click the New button.
4. Select Group in Item code, RM in Item relations and 191001 in Main account field. “Cost of purchased materials received” posting type is used when Product receipt on the Purchase order is posted.
5. From the left pane select “Cost of purchased materials invoiced” and click New button.
6. Select Group in Item code, RM in Item relations and 191001 in Main account field. “Cost of purchased materials invoiced” posting type is used when the Purchase invoice is posted.
7. Similarly define Main account 450001 for posting type “Purchase expenditure, un-invoiced“, main account 260001 for posting type “Purchase, accrual“, account 450002 for posting type “Purchase expenditure for product” and 460001 for posting type “Purchase expenditure for expense“

Once the entire posting profile for the Purchase order is completed it will look like the following screenshot and as shown in the table below.

Posting type	Main account	Account name
Cost of purchased materials received	191001	Raw material inventory
Purchase expenditure, un-invoiced	450001	Purchase expenditure, un-invoiced
Purchase, accrual	260001	Raw material accrued liability
Purchase expenditure for product	450002	Raw material purchase expenditure
Cost of purchased materials invoiced	191001	Raw material inventory
Purchase expenditure for expense	460001	Raw material purchase expenses

You can now determine which posting types are used for posting to each main account from the above table. Setup Posting type validation for each main account for posting types as listed in the above table e.g. setup “Cost of purchased materials received” and “Cost of purchased materials invoiced” as valid posting source on main account 191001-Raw material inventory.

Procurement of Stocked product

Released item definitions

Create two new released products GT-RM-01 and GT-RM-02 with the following setups.

Field	Value
Item type	Item
Product subtype	Product
Item group	RM
Production type	None

Item model group definition

Parameter	Value
Stocked product	Yes
Inventory model	FIFO, LIFO, LIFO date, Weighted avg. or Weighted avg. date
Include physical value	Yes
Post physical inventory	Yes
Post financial inventory	Yes
Financial negative inventory	Yes
Physical negative inventory	No

Storage dimension group definition

Parameter	Value
Dimensions active	Site, Warehouse, and Location
Physical inventory tracking	Site, Warehouse, and Location
Financial inventory tracking	Site

Tracking dimension group definition

Parameter	Value
Batch number	No
Serial number	No

Purchase order creation

Create a Purchase order as per the following data:

Item number	Quantity	Unit price	Discount	Discount %	Net amount
GT-RM-01	10	10.00	0	0	100.00
GT-RM-02	10	20.00	0	10	180.00
				Total	280.00

Product receipt voucher

Post a Product receipt for quantities as mentioned in the below table. The Product receipt vouchers are posted only if Post physical inventory and Post product receipt in ledger parameters are enabled on Item model group definition and Accounts payable parameters respectively.

Item number	Quantity	Unit price	Discount	Discount %	Net amount
GT-RM-01	10	10.00	0	0	100.00
GT-RM-02	10	20.00	0	10	180.00
				Total	280.00

Now let’s analyze the following accounting vouchers posted for the Product receipt. When Product receipt is posted in Microsoft Dynamics 365 Finance and SCM, the system generates two accounting vouchers below for India and China Localization (This might be happening for other countries).

Voucher#	Posting type	Account	Debit	Credit
Receipt costing voucher	Cost of purchased materials received	191001	280
Receipt costing voucher	Purchase expenditure, un-invoiced	450001		280
Product receipt voucher	Purchase expenditure, un-invoiced	450001	280
Product receipt voucher	Purchase, accrual	260001		280

However, when we see the Product receipt vouchers for US, Japan, Australia localization, it generates only two lines as per below, though the net accounting impact remains the same that is “Debit Inventory account with provisional cost and Credit the accrued liability account.

Readers who worked for other localizations can share the set of vouchers posted at the time of Product receipt in the comment section.

Voucher#	Posting type	Account	Debit	Credit
Product receipt voucher	Cost of purchased materials received	191001	280
Product receipt voucher	Purchase, accrual	260001		280

In Microsoft Dynamics 365 FInance and Operations only estimated (provisional) inventory is posted and estimated (provisional) liability is accrued, which will be reversed with actual cost available while booking Purchase invoice against the Product receipt which means the Product receipt vouchers are reversed at the time when Purchase invoice is posted and actual inventory and liability get accounted with the amount available on the Purchase invoice document. This means that in Microsoft Dynamics 365 for Finance the inventory costing event for Purchase is the Purchase invoice and not the Product receipt (except for Invent model Moving average and Standard cost)

Purchase invoice voucher

Post a Purchase invoice for the Product receipt posted in the previous step without changing Unit price, discounts or adding any other charges at the invoice level.

Item number	Quantity	Unit price	Discount	Discount %	Net amount
GT-RM-01	10	10.00	0	0	100.00
GT-RM-02	10	20.00	0	10	180.00
					280.00

At the time of invoicing also, two vouchers are posted.

Line #	Voucher#	Posting type	Account	Debit	Credit
1	Invoice voucher	Purchase expenditure, un-invoiced	450001		280
2	Invoice voucher	Purchase, accrual	260001	280
3	Invoice voucher	Purchase expenditure for product	450002	280
4	Invoice voucher	Vendor balance			280
5	Invoice costing voucher	Cost of purchased materials received	191001		280
6	Invoice costing voucher	Purchase expenditure, un-invoiced	450001	280
7	Invoice costing voucher	Cost of purchased materials invoiced	191001	280
8	Invoice costing voucher	Purchase expenditure for product	450002		280

Invoice voucher consists of the following accounting impact:

• Reversal of Product receipt voucher (Line #1 and #2) which was posted during the Product receipt.
• Vendor liability account (taken from Vendor posting profiles) is credited by net invoice amount
• If there is no additional costs other than the Line amount on Purchase invoice which is inventorized then the Net amount is Debited to the “Purchase expenditure for product” account from Item posting profile.

The invoice costing voucher consists of the following impacts:

• Reversal of the Receipt costing voucher (Line #5 and #6) in following table. posted during the Product receipt voucher.
• The “Purchase expenditure for product” account which was credited during the Invoice voucher (Line #3) gets credited by the same amount (Line #8).
• The “Cost of purchased materials invoiced” also know as actual financial inventory cost is debited by the same amount which is credited to the “Purchase expenditure for product” account (Line #7).
• Here the “Purchase expenditure for product” account is used to transfer the cost of materials debited in Invoice voucher to the “Cost of purchased materials invoiced”.

The net accounting impact of the Purchase invoice voucher is debit to the financial inventory account (Cost of purchased materials invoiced) and credit to the Vendor account (Vendor balance).

If you see the “Purchase expenditure for product” account getting knocked off during the Purchase invoice itself, this is not always the case. For item models having Invent model weighted average, Weighted average date

Procurement – Expense products

Released product definition for expensed product

Create a new released product GT-RM-Exp-01 with the following setups.

Field	Value
Item type	Item or Service
Product subtype	Product
Item group	RM
Production type	None

Item model group definition for expensed product

Parameter	Value
Stocked product	No
Inventory model	Not applicable
Include physical value	Not applicable
Post physical inventory	Not applicable
Post financial inventory	Not applicable
Financial negative inventory	Yes. Disabled and selected by default
Physical negative inventory	No. Disabled and selected by default.
Accrue liability on product receipt	Yes

Tracking dimension definitions for expensed product

Parameter	Value
Dimensions active	Site, Warehouse
Physical inventory tracking	Site, Warehouse
Financial inventory tracking	Site

Tracking dimension definition for expensed products

Parameter	Value
Batch number	No
Serial number	No

Create a Purchase order as per the following data:

Item number	Quantity	Unit price	Discount	Discount %	Net amount
GT-RM-Exp-01	10	100.00	0	0	1000.00
				Total	1000.00

Product receipt voucher for expensed Products

Post a Product receipt for quantities as mentioned in the below table. The Product receipt vouchers are posted only if the “Accrue liability on product receipt” parameter is enabled on the Item model group. The “Accrue liability on product receipt” parameter on Item model groups form empower us to do accrual accounting in case of not stocked products also, which is required by most of the accounting standards.

Item number	Quantity	Unit price	Discount	Discount %	Net amount
GT-RM-Exp-01	10	100.00	0	0	1000.00
				Total	1000.00

Now let’s analyze the following accounting vouchers posted for the Product receipt. When Product receipt is posted in Microsoft Dynamics 365 Finance and SCM, the system generates an accounting voucher as per below.

The “Purchase expenditure, un-invoiced” gets debited by the sum of the Line net amount and the entry is offset by “Purchase, accrual” account on the credit side.

Line #	Voucher#	Posting type	Account	Debit	Credit
1	Product receipt voucher	Purchase expenditure, un-invoiced	450001	1000
2	Product receipt voucher	Purchase, accrual	260001		1000

In Microsoft Dynamics 365 FInance and Operations only estimated (provisional) expense is posted and estimated (provisional) liability is accrued, which will be reversed with actual cost available while booking Purchase invoice against the Product receipt which means the Product receipt vouchers are reversed at the time of purchase invoice and actual expenses and liability gets accounted with the amount available on the Purchase invoice document.

Purchase invoice voucher for expensed products

Post a Purchase invoice for the Product receipt posted in the previous step without changing Unit price, discounts or adding any other charges at the invoice level.

Item number	Quantity	Unit price	Discount	Discount %	Net amount
GT-RM-Exp-01	10	100.00	0	0	1000.00
					1000.00

At the time of invoicing also, two vouchers are posted.

Line #	Voucher#	Posting type	Account	Debit	Credit
1	Invoice voucher	Purchase expenditure, un-invoiced	450001		1000
2	Invoice voucher	Purchase, accrual	260001	1000
3	Invoice voucher	Purchase expenditure for expense	460001	1000
4	Invoice voucher	Vendor balance			1000

When there is a price difference in terms of either unit price or discount or maybe through actual charges accounted at the time of Invoicing then the actual expense and vendor liability may arise with revised costs available in the Purchase invoice document. Let’s assume if the variance is due to the Unit price on the Purchase invoice document then the accounting entry for the Purchase invoice looks like below:

Item number	Quantity	Unit price	Discount	Discount %	Net amount
GT-RM-Exp-01	10	125.00	0	0	1250.00
					1250.00

Line #	Voucher#	Posting type	Account	Debit	Credit
1	Invoice voucher	Purchase expenditure, un-invoiced	450001		1000
2	Invoice voucher	Purchase, accrual	260001	1000
3	Invoice voucher	Purchase expenditure for expense	460001	1250
4	Invoice voucher	Vendor balance			1250

Invoice voucher consists of the following accounting impact:

• Reversal of Product receipt voucher (Line #1 and #2) which was posted during the Product receipt.
• Vendor liability account (taken from Vendor posting profiles) is credited by net invoice amount
• If there is no additional costs other than the Line amount on Purchase invoice which is inventorized then the Net amount is Debited to the “Purchase expenditure for expense” account from Item posting profile.
• Since the items are non-stocked the invoice costing voucher is not posted in such cases.

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Please share your thoughts and suggestions in the comment section.

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