Business Central Inventory GL Entries - Purchases
- Ken Sebahar
- Aug 6
- 8 min read
Updated: Oct 9
One of the major advantages of using Business Central is the real-time integration between the various subledgers and the General Ledger. But in order to fully leverage the power of Business Central’s financial reporting capabilities, it is important to understand how Posting Groups are used to automatically generate G/L Entry records when sales, purchase, or production orders are posted.
It is the “Posting Groups” which determine the G/L Accounts that get debited and credited in the General Ledger during posting of invoices and other transactions throughout the system. And when inventory Items are involved in these transactions, there are multiple types of Posting Groups that are used to create these journal entries. Understanding exactly how the Posting Groups are used to generate the inventory-related G/L Entries is required to ensure that your financial reports are accurate and can be easily understood by those relying on these reports. Unfortunately, Microsoft does not provide a comprehensive overview of the entire Purchasing G/L workflow, Sales G/L workflow, Production G/L workflow, or Projects G/L workflow.
In this post, we will walk through all of the G/L Entry records created during every step of the inventory purchasing processes. This primarily will include the receipt of inventory against a Purchase Order, the invoicing of the received items, and the posting of Item Charges to apply inbound freight costs to the received items. Look for future posts to cover inventory sales G/L entries, the inventory production (manufacturing) G/L entries, and other types of inventory-related transactions.
For each transaction, we will review (1) how the appropriate Posting Group record to use is identified, (2) the specific posting setup fields used within each GL Entry, and (3) provide some guidance as to the type of G/L Account that should be used for each setup field.
Background and Assumptions
How and when inventory-related G/L Entries get created is dependent on settings defined on the Inventory Setup page. For the purposes of this exercise, the following 3 fields on the Inventory Setup page are important:
Automatic Cost Posting: determines if inventory cost entries are posted to the General Ledger in real-time as inventory transactions are posted.
This field should be enabled (Yes) unless it is a very high-volume transaction environment where performance and database size could be an issue (this is not typical). This setting can be changed at any time, so in most instances it should be enabled.
Automatic Cost Adjustment: determines the frequency with which the “Adjust Cost – Item Entries” process is performed.
Similar to the Automatic Cost Posting field, this field should be set to “Always” unless it is a very high-volume transaction environment. This setting can also be changed at any time. If it is not set to “Always”, then the process must be manually run at the end of each accounting period to ensure that all Item costs are current and accurate.
For additional details on the “Adjust Cost – Item Entries” process, please refer to this Speaking Business Central post: Adjust Cost – Item Entries: What It Is and Why You Need It.
Expected Cost Posting to G/L: This field determines whether “Interim” entries, or expected cost entries, are posted to the G/L during receipt of an Item against a Purchase Order, or during the shipment of an Item against a Sales Order.
This field should be enabled (Yes) in most companies that manage Inventory Items. In a nutshell, expected cost posting ensures that the balance sheet properly reflects the value of inventory and the future liability to the vendor when items are received into a warehouse location. Why would you not want this? I’m sure there are reasons, but in most instances, this automation is highly appreciated by most accountants.
Scenario Details
The Cronus Brewery buys and sells branded koozies. These koozies are manufactured by a vendor at a cost to Cronus Brewery of $1.00 EA. Additionally, an additional invoice will be received from a shipping carrier for the inbound freight charges. This shipping fee per unit will depend on the number of koozies shipped. The Item Charges feature will be used to apply the specific shipping fee the purchase receipt so that the actual shipping fee is applied to the appropriate inventory cost layer.
The new Purchase Order shown is created to order 1,000 koozies for $1,00 EA, for a total expected cost of $1,000.00. There will also be a shipping charge, but we do not yet know the exact cost of this, so a note is added to the Purchase Order to confirm that this fee will be added when the order is invoiced.
No G/L Entry records are created when the Purchase Order is created.
January 15, 2025
A Purchase Receipt for 1,000 EA is posted.
The following G/L Entry records are created:
Entry #1
Debit: Inventory Posting Setup – “Inventory Account (Interim)”
Based on the Inventory Posting Group assigned to the Item.
Typically defined as an Asset type G/L Account.
Credit: General Posting Setup - “Invt. Accrual Acc. (Interim)”
Based on the combination of Gen. Bus. Posting Group assigned to the Vendor and the Gen. Prod. Posting Group assigned to the Item.
Typically defined as a Liability type G/L Account.
This GL Entry ensures that the balance sheet properly reflects the value of on-hand inventory and the expected payables liability as of the receipt date even if the invoice has not yet been posted. This is important if the receipt and invoice are processed in two different accounting periods.
February 5, 2025
The Purchase Invoice is posted for $900.00 (to reflect an unexpected promotional discount of 10% applied to the invoice, which was not reflected on the Purchase Order).
Note: There are effectively 3 separate G/L Entries that are processed when the Purchase Invoice is posted. These 3 entries are created using 2 separate G/L Registers which can be determined via the “Source Code” assigned to the GL Entry records (INVTPCOST and PURCHASES) in the entries below:
Entry #2
This entry is built as an exact reversal of the interim GL Entry created above when the Purchase Receipt was posted. The result is to zero out the “Interim” G/L Accounts.
Entry #3
Debit: General Posting Setup – “Purch. Account”
Based on the combination of Gen. Bus. Posting Group assigned to the Vendor and the Gen. Prod. Posting Group assigned to the Item.
Typically defined as a Cost of Goods Sold type G/L Account.
Credit: Vendor Posting Groups – “Payables Account”
Based on the Vendor Posting Group assigned to the Vendor.
Typically defined as a Liability type G/L Account.
Entry #4
Debit: Inventory Posting Setup – “Inventory Account”
Based on the Inventory Posting Group assigned to the Item.
Typically defined as an Asset type G/L Account.
Credit: General Posting Setup – “Direct Cost Applied Account”
Based on the combination of Gen. Bus. Posting Group assigned to the Vendor and the Gen. Prod. Posting Group assigned to the Item.
Typically defined as a Cost of Goods Sold type G/L Account.
Credit: General Posting Setup – “Overhead Applied Account” (see note below)
Based on the combination of Gen. Bus. Posting Group assigned to the Vendor and the Gen. Prod. Posting Group assigned to the Item.
Typically defined as a Cost of Goods Sold type G/L Account.
NOTE: This entry will only be created if the “Indirect Cost %” or “Overhead Rate” fields have been populated with a value on the Item Card.
A common question is: Why does the system create two separate entries (#3 and #4)? Or asked another way, why doesn’t the system just create one G/L Entry that debits “Inventory” and credits “Accounts Payable”? As you can see by the potential entries created above, the result of posting the Purchase Invoice could result in a value of inventory that is greater than the amount owed to the Vendor for the purchase of the Item due to the use of the “indirect cost” fields on the Item Card which can be used to apply additional costs to the value of inventory (commonly referred to as “landed cost”). This option would be an alternative to use of the Item Charges feature which directly assign these types of additional costs to receipts instead of indirectly assigning the additional costs based on a pre-set percentage or amount.
A second common question is: Can the “Purch. Account” and the “Direct Cost Applied Account” on the General Posting Setup record to set up to use the same G/L Account since these entries will wash against one another when the Purchase Invoice is post? While the answer is Yes, a better suggestion is to use two separate G/L Accounts for clearer visibility to the source of each GL Entry during transaction auditing.
When presenting these G/L Accounts on a Financial Report, the “Purch. Account” and “Direct Cost Applied Account” can be combined on a single row to avoid confusion by the users of the financial reports.
February 12, 2025
A Purchase Invoice is received from the freight carrier for $50. This invoice references the original shipment of the 1,000 koozies from the Purchase Order.
To process this entry, a new Purchase Invoice is entered for the freight carrier vendor. The line is created with a Type = Item Charge, and the $50 is applied to the Purchase Receipt above using the Item Charge Assignment page. For more information on the use of Item Charges, refer to the Microsoft Learn page: Use item charges to account for extra trade costs.
Similar to the Purchase Invoice posted for the koozies, the posting of this Purchase Invoice will result in two separate GL Entries:
Entry #5
Debit: General Posting Setup – “Purch. Account”
Based on the combination of Gen. Bus. Posting Group assigned to the Vendor and the Gen. Prod. Posting Group assigned to the Item Charge.
Typically defined as a Cost of Goods Sold type G/L Account.
Credit: Vendor Posting Groups – “Payables Account”
Based on the Vendor Posting Group assigned to the Vendor.
Typically defined as a Liability type G/L Account.
Entry #6
Debit: Inventory Posting Setup – “Inventory Account”
Based on the Inventory Posting Group assigned to the Item.
Typically defined as an Asset type G/L Account.
Credit: General Posting Setup – “Direct Cost Applied Account”
Based on the combination of Gen. Bus. Posting Group assigned to the Vendor and the Gen. Prod. Posting Group assigned to the Item.
Typically defined as a Cost of Goods Sold type G/L Account.
Results and Summary
After posting all of these entries, we have a single Item Ledger Entry reflecting that 1,000 koozies were received on January 15, 2025 with a total inventory value of $950.00.
This result is reflected on the Inventory Valuation report:
The result is also reflected in the Item Ledger Entries:
From the Item Ledger Entry, drill-down on the “Cost Amount (Actual)” field to see all entries associated with this cost layer:
1) The original “interim” or expected cost of the Item.
2) The reversal of the “Interim” cost and recording of the actual cost.
3) The freight charges applied to this cost layer via the Item Charge.
As we have demonstrated here, Business Central provides powerful inventory costing and valuation capabilities, including real-time integration with the General Ledger.
The end result is that by properly setting up the various Posting Groups and following other suggested best practices (10 Best Practices for Financial Setups), the month-end inventory reconciliation task becomes as simple as running the Inventory Valuation report and confirming it matches the “Inventory” G/L Accounts on your Financial Reports!
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