Business Central Inventory GL Entries - Purchases (Standard Costing)
- Ken Sebahar
- Sep 3
- 6 min read
In an earlier post called Business Central Inventory GL Entries - Purchases, we walked through how inventory-related General Ledger Entries are created within Business Central throughout the Purchasing process (Receiving and Invoicing of a Purchase Order). In that prior post, FIFO was set as the Costing Method on the Item Card in order to demonstrate how the valuation of inventory was calculated and reflected on the financial statements.
In this post, we will again walk through all of the G/L Entry records created during every step of the inventory purchasing processes, however we will use an Item that has been setup to use the Standard Costing Method.
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.
Standard Costing Purchasing Scenario Details
The Cronus Brewery makes and sells beer, which is commonly packaged in 12 oz. aluminum cans. These cans are purchased by Cronus Brewery from a vendor and although the price of aluminum fluctuates, they apply a standard cost of $0.10 per can to calculate their Bill of Material costs. If there are significant changes to the cost of aluminum, the standard cost and the value of any on-hand inventory will be adjusted. Therefore, the Costing Method in Business Central for this Item will be set to "Standard".
July 1, 2025
A new Purchase Order is created for 10,000 EA of the 12 Oz. Aluminum Cans at a purchase price of $0.095/EA, for a total expected cost of $950.00. (These cans are expected to cost $0.005 less than the Standard Cost currently set for the Item, which will generate a Purchase Price Variance.)
No G/L Entry records are created when the Purchase Order is created.
July 28, 2025
A Purchase Receipt for 10,000 EA is posted.
The following General Ledger 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.
Important to note is that the G/L Entry generated to record the Interim (Expected Cost) is calculated using the Standard Cost of the Item, not the Unit Cost on the Purchase Order. This is to ensure that the value of the Item is always reflected in inventory using the Standard Cost assigned to the Item. Any variance between the actual purchase price and the standard cost will not be reflected on the Inventory Valuation report or on the Financial Reports until the Purchase Order is invoiced.
August 4, 2025
The Purchase Invoice is posted for $950.00.
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 generated 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
This entry is generated to reflect the actual amount that will be payable to the vendor.
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
This entry is generated to reflect the actual cost of the Item in inventory. Since the Costing Method for this Item is set to "Standard", it is at this point that the Purchase Variance (aka "Purchase Price Variance") is recorded.
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.
Debit: Inventory Posting Setup – “Inventory Account” (to adjust to the Standard Cost)
Based on the Inventory Posting Group assigned to the Item.
Typically defined as an Asset type G/L Account.
NOTE: This entry will only be created if Direct Unit Cost on the Purchase Order is different than the Standard Cost of the Item.
Credit: General Posting Setup – “Purchase Variance 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.
NOTE: This entry will only be created if Direct Unit Cost on the Purchase Order is different than the Standard Cost of the Item.
Results and Summary
After posting all of these entries, we have a single Item Ledger Entry reflecting that 10,000 12 Oz. Aluminum Cans have been received at a total inventory value of $1,000.00.
The results of the above transactions are reflected on the Inventory Valuation report. This value is included within the inventory valuation at the standard cost effective the Posting Date of the Purchase Receipt.
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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