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  • Writer's pictureKen Sebahar

10 Best Practices for Financial Setups in Microsoft Dynamics 365 Business Central

One of the great characteristics of Microsoft Dynamics 365 Business Central (BC) is the flexible nature in which many of the features were developed. There is no doubt that as the development team developed features and functionality, they maintained a constant focus on ensuring that organizations using BC had options in how they chose to set up and configure the solution. During my many years assisting clients with setting up Dynamics NAV and BC, I have often found myself saying: with flexibility comes complexity. The options for setting up the Chart of Accounts, Dimensions, and Posting Groups within BC can result in people becoming overwhelmed as they try to define how the system will be set up, knowing that some of the decisions that are made will have a major impact on the organization for years to come.


This list of best practices is intended to help alleviate some of the stress that very often accompanies the financial setup task in Business Central. Please consider these “best practices” or “guidelines” as opposed to “rules”, since no two organizations are exactly alike and ultimately, it is the flexibility in how Business Central is set up that allows it to become such a great asset for your organization.


1. Use Totaling Accounts within the Chart of Accounts

The Chart of Accounts page in Business Central highlighting the Account Type field
The Chart of Accounts page in Business Central highlighting the Account Type field

Business Central provides the ability to set up Totaling Accounts within the Chart of Accounts. Defined by using the Account Type field, these G/L Accounts are used for improving the visual display and organization of the Chart of Accounts. But they are also used for calculating subtotals for a subset of G/L Accounts. For example, if you have multiple bank accounts, you can create a Totaling account called “Total Cash & Equivalents” that sums up the balances in these bank accounts to provide a total directly within the Chart of Accounts. These Totaling accounts are displayed in Trial Balance reports and also can be auto inserted as rows on Financial Reports. Note: if you sometimes prefer to run reports without including these Totaling accounts, you can filter these out by running reports for G/L Accounts where Account Type is Posting.


Do you have to use Totaling accounts? No. But then anytime you want to see a subtotal of a set of G/L Account values, you will have to create or calculate these totals yourself. Why do that to yourself? (And “Because that’s the way we did it in the old system.” is not a valid reason.)


2. Use Dimensions for segmented financial reporting.

The Dimensions list page in Business Central showing examples of how Dimensions can be used
The Dimensions list page in Business Central showing examples of how Dimensions can be used

Business Central provides a feature called “Dimensions” that can be used to perform detailed financial reporting analysis. An unlimited number of Dimensions can be setup to provide segmented financial reporting for any entity that may be meaningful to each organization. Examples of potential Dimensions include (but are not limited to) Department, Cost Center, Territory, Customer Class, Product Class, and even Salesperson, Employee, or Project.


The Chart of Accounts setup should only include the “primary” or “natural” account number, which is typically a 4-to-6-digit code and describes accounts such as “Prepaid Expenses”, “Accounts Payable”, or “Wage Expense”. The Chart of Accounts should be static – that is, once set up, adding new G/L accounts should be a rare event. The reason for maintaining a static Chart of Accounts and using Dimensions is that it is much simpler to set up a new Dimension value than to set up one or multiple new G/L Accounts each time a new department or territory is added within the organization.


Dimensions have been provided specifically to enable strong financial reporting capabilities directly from within Business Central. So please, use them.


3. Only use Dimensions for financial reporting purposes


If you understand the power of Dimensions, you may be tempted to use Dimensions for segmenting Customers, Vendors, Items, or other entities in Business Central by Dimension for use outside of financial reporting. Avoid the temptation.


While it is possible to extend the use of Dimensions outside of strictly financial reporting (Income Statement, Trial Balance, etc.), it is not recommended. As noted, Dimensions are designed specifically for use with financial reporting. If you attempt to use them for additional reporting and analysis requirements, because of the structure of how the Dimension data exists within Business Central, you may find that it is not easy to generate the data set to meet your reporting requirements.


Therefore, if these groups or characteristics (of Customers or Items, for example) that are required for reporting purposes, but these reports are use Customer or Item data as the primary data source (they do not require the G/L Entry table as the primary data source), the suggestion is to use existing fields or even custom fields as opposed to Dimensions.


4. Setup G/L Account Subcategories

The G/L Account Categories page in Business Central with sample data
The G/L Account Categories page in Business Central with sample data

There are 2 fields on the G/L Account record that were added to assist with categorizing the G/L Accounts: G/L Account Category and G/L Account Subcategory. These fields are not required, so it is easy to skip over these fields when creating or importing G/L Account records, but then you will not be able to take advantage of the functionality that auto-generates the Financial Reports in Business Central.


The G/L Account Category field is an option type field with a pre-defined list of choices (Asset, Liability, etc.). This field is relatively straightforward and easy to populate.


The G/L Account Subcategory field is a little more complicated. This field is based on an underlying table that must be populated by each organization based on their own Chart of Accounts and financial reporting requirements. An unlimited number of subcategories can be created, and once assigned to each G/L Account, the “Generate Financial Reports” process can be run from the G/L Account Categories page to auto-build a Balance Sheet, Income Statement, Cash Flow Statement, and Retained Earnings Statement.


5. Minimize the number of Posting Groups

An example of how the Vendor Posting Setup records can be created in Business Central
An example of how the Vendor Posting Setup records can be created in Business Central

Understanding and setting up Posting Groups can be one of the most intimidating and mind-boggling tasks during a Business Central implementation. This is definitely one of the areas where the original developers kept flexibility at the forefront. But this flexibility and power also leads to confusion when it comes to defining how General Business Posting Groups or Inventory Posting Groups should be defined and used.


In summary, Posting Groups are assigned to Customers, Vendors, Items, Bank Accounts, and other master records throughout Business Central to drive auto-generation of G/L Entries when transactions are posted throughout the system.


This is not the forum for describing each Posting Group, but the #1 strategy that can be employed when setting up Posting Groups is to start with setting up only the absolute minimum number of Posting Groups that are required to accomplish the G/L Entry creation and financial reporting that is required for the organization.


Only after the minimum Posting Groups have been set up, tested, and understood should the use of the Posting Groups be expanded to become another opportunity for slicing and dicing your data for reporting purposes. Here is an example using Vendor Posting Groups on how you can expand the use of Posting Groups to provide improved reporting and analysis capabilities: If there is only one “Accounts Payable” account in the Chart of Accounts, then only one Vendor Posting Group is required. However, perhaps you would like the ability to run purchasing or payables reports by the type of Vendor – such as Material Suppliers, Services, and Employees. One option would be to create these 3 Vendor Posting Groups and have all three assigned to the same “Accounts Payable” account. This keeps the G/L integration simple yet provides the required vendor reporting capabilities.


6. Utilize the Direct Posting field on G/L Accounts

The G/L Account Card page in Business Central highlighting the Direct Posting field
The G/L Account Card page in Business Central highlighting the Direct Posting field

The Direct Posting field on the G/L Account Card controls what type of entries are allowed to be posted: Indirect only (not checked), or Direct and Indirect (checked).


An indirect entry is an entry that has been generated through the use of a Posting Group. An example of an indirect entry would be a credit to the Finished Goods Inventory Account when a negative inventory adjustment is posted for an Item. In this example, the user does not specifically select which G/L Account to post to, rather it is the Inventory Posting Group that is assigned to the Item (and the underlying Inventory Posting Setup table) that determines which G/L Account was posted.


A direct entry is any entry where the user directly selected Type of “G/L Account” and the specific G/L Account to be used. Examples of this would be a General Journal entry that is being entered to record weekly payroll expenses (“Salary Expense”) or a Purchase Invoice posted for the monthly rent (“Rent Expense”).


The best practice on setting the Direct Posting field on the G/L Account Card is to disable direct posting for any G/L Account that is used in a Posting Group setup record. This would include Accounts Payable, Payment Discounts, Inventory, Sales, Cost of Goods Sold, Inventory Adjustments, etc. This is the key to keeping balance sheet type G/L Accounts fully reconciled to their subledgers at all times. It also provides clarity around the transaction types that are hitting each G/L Account. If there is the need to occasionally adjust a G/L Account, you can temporarily enable direct posting, or an additional G/L Account can be created for posting manual adjustment entries to indirect-only G/L Accounts. To confirm if a G/L Account is currently used in any Posting Groups, use the “Where-used List” from the G/L Account List or G/L Account Card page.


7. Use each G/L Account for a single purpose in Posting Groups

Each Posting Group setup page is comprised of a list of different columns which are used to generate G/L Entry records for various types of transactions. For example, on the General Posting Setup table, there is a “Purchases Account”, a “COGS Account”, and an “Inventory Adjustments” account. If the same G/L Account were used for all three of these (or even two of them), it would be very difficult for the reader of a financial statement to understand what exactly caused an unexpected value.


Therefore, similar to the use of the Direct Posting field on the G/L Account record, this best practice is to ensure that it is easy to reconcile G/L Accounts to their related subledgers and also make it very clear to all financial report viewers which transactions are driving activity to each G/L Account.


There are 2 notable exceptions to this guideline of using a different G/L Account for each Posting Group setup field. The first is the “Sales Account” and “Sales Credit Memo Account” on the General Posting Setup page. Most often these are set to the same G/L Account so that if a Sale was posted in error and needs to be reversed via a Credit Memo, the end result is zero balance in the G/L Account. The second is the “Purchases Account” and “Purchases Credit Memo Account” on the General Posting Setup page (same idea as the Sales example, except on the payables side).


8. Do not link multiple Bank Accounts to a single G/L Account

The Bank Accounts list page in Business Central showing sample setup data
The Bank Accounts list page in Business Central showing sample setup data

Business Central includes ever-improving built-in Bank Reconciliation features. These Bank Reconciliation features reconcile the cleared bank transactions against the Bank Ledger Entries, not the G/L Entries. Therefore, instead of posting bank-related entries directly to a “G/L Account”, users must post all bank-related entries to a “Bank Account” which is then linked through a Bank Account Posting Group to a G/L Account. To keep the Bank Account Entries and the G/L Entries synchronized and reconciled, a one-to-one relationship between the Bank Account and the G/L Account is required.


9. Use a single WIP Account for all Inventory Posting Groups

The Inventory Posting Setup page in Business Central showing sample setup data
The Inventory Posting Setup page in Business Central showing sample setup data

This one is pretty simple: If the Manufacturing module is being used and several different Inventory Posting Groups exist, a single “Work in Process” G/L Account should be assigned to all Inventory Posting Setup records.


Why? Because when a raw material is consumed to a Production Order, the system uses the “WIP Account” assigned to the raw material Item record to determine which G/L Account to use for WIP. But when the finished good Item is output into Inventory, the system uses the “WIP Account” assigned to the finished good Item record to determine which G/L Account to use for WIP. As you can quickly figure out, if a different WIP Account were used for each of these types of items, you would not end up with a zero balance in either of the WIP Accounts.


Are there scenarios where multiple WIP Accounts can work? Yes. But keep it simple and use one WIP Account. You can still run most of the reports available in Business Central by Inventory Posting Group, but you likely don’t need this breakdown reflected in the financial statements.


10. Do not delete G/L Accounts

The Chart of Accounts page in Business Central showing an Active Accounts saved filtered list
The Chart of Accounts page in Business Central showing an Active Accounts saved filtered list

Business Central officially allows G/L Account records to be deleted from the Chart of Accounts provided that there is currently no balance in the G/L Account and there are no posted G/L Entry records in an open fiscal year.


However, if a G/L Account is no longer needed, the best practice is to keep the G/L Account in the Chart of Accounts and set the “Blocked” field to Yes. This will prevent future transactions from being posted to the G/L Account while continuing to ensure that prior period financial reporting is not impacted by the deletion of G/L Accounts. For example, a Trial Balance report typically builds rows on the report by listing each G/L Account currently in the Chart of Accounts and then displaying the net change and/or balance for each G/L Account. In this example, if a G/L Account has been deleted and the report was run for a period in which G/L Entries existed for that G/L Account, the report would not display accurate data.


Once the G/L Account is blocked, Views and Reports can be filtered to only include non-Blocked G/L Accounts. Additionally, the G/L Account could be renumbered (for example by adding an “X” to the beginning of the number) so that these blocked/obsolete G/L Accounts are sorted to display at the very bottom of any G/L Account-based view or report.

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