Business Central Projects: Item Cost G/L Posting

Many types of Projects will require the use of inventory items to complete - from building a custom machine to designing a new office. In some instances, organizations will purchase Items specifically for a single Project, while in other instances Items are consumed from inventory. And in many instances, it is a combination of both special ordered Items and usage of existing inventory.

It can be very difficult to trace the flow of General Ledger Entries as Items are purchased and consumed against Projects, particularly if the Posting Group Setups are not setup properly. Therefore, is it very important to understand exactly how each Project-related G/L Entry is created. Accurate setup and an understanding how of the G/L Entries are being created will ensure that financial reporting is accurate.

In this post, we will walk through each of the inventory-related scenarios above, review the G/L Entries created, and discuss the impact of these scenarios. Finally, we will review the role of the Project WIP functionality in inventory cost reporting.

Note: this post will cover the consumption of inventory Items to Projects. Resources, or labor/capacity usage will be addressed separately.

Scenario Overview

Cronus USA, Inc. has created a new Project to develop a new Cold Lager beer. The Project has been set up as follows in Business Central:

The Project Card page in Business Central

This Project has a single Project Task which will be used to estimate and record all project costs. The total budgeted cost for this Project is $6,000.00. We can see the details of these costs if we drill-down into the Project Planning Lines:

The estimated Project costs are comprised of both Resources (labor and other non-inventory costs) as well as Items that must be used to successfully complete the Project. The Items to be consumed to the Project are highlighted above.

For this specific Project:

• The Malt and Hops (Item Nos. 1123 and 1124) will be consumed from on-hand inventory.

  • For a detailed review of the General Ledger Entries created when inventory Items are purchased into inventory, please review this prior post: Business Central Inventory GL Entries - Purchases.

• The bottles (Item No. 1125) will be custom ordered specifically for this Project. We will use the Project purchasing functionality to generate the required Purchase Order.

  • For a comprehensive review of the Project purchasing functionality on Microsoft Learn, please review Microsoft Learn: Manage Project Supplies.

PART 1: Recording the usage of Items from On-hand inventory to a Project

To keep things simple, we will record the usage of the Malt (Item No. 1123) against the Project and we will skip the review of the Hops usage.

As seen in the screenshot above, the "Unit Cost" on the Job Planning Line is $1.00/Lb. This value is used to create the budgeted cost for the Project. This value was copied from the "Unit Cost" field on the Item Card at the point when the Project Planning Line was created. (The user does have the ability to manually override the default value if it is known what the actual cost will be and would this cost reflected in the budget.)

The Project Journal page is used to record the consumption of 100 Lb. of Item No. 1123:

The Project Journal - used to record the usage of Items against Project Tasks

You will notice that the "Unit Cost" on the Project Journal line for this Item is $0.95. This value was defaulted using the "Unit Cost" field on the Item Card page. Depending on the Costing Method assigned to the Item and the settings defined on the Inventory Setup page, the "Adjust Cost - Item Entries" process will run to ensure that the actual cost posted from inventory to the Project is the actual cost, based on the application to the existing Item Ledger Entries.

For the purposes of this example, the 100 Lbs consisted of a single cost layer at $0.95/Lb. The G/L Entry record created during posting was:

Entry #1

To record the consumption of Item No. 1123 against Project J00110

• Debit: General Posting Setup – “Inventory Adjmt. Account”

  • Based on the Gen. Prod. Posting Group assigned to the Item and no (blank) Gen. Bus. Posting Group.

  • Typically defined as a Cost of Goods Sold type G/L Account.

• Credit: Inventory Posting Setup – “Inventory Account"

  • Based on the Inventory Posting Group assigned to the Item and the Location Code set on the Project Journal line.

  • Typically defined as an Asset type G/L Account.

To consume the 50 Lbs. of the Hops, the same steps as above are used and the General Ledger Entry records created use the same structure as Entry #1 above.

PART 2: Recording the usage of Items ordered from the Project

The 12 oz. bottles required for this project will be ordered specifically for this Project through the standard Create Purchase Order functionality available from the Project Card page or Project Planning Lines page.

For this Item, we will navigate to the Project Planning Lines page, and use the Create Purchase Orders function to order the bottles (Item No. 1125):

The Create Purchase Order page run from the Project Planning Lines page

The resulting Purchase Order:

The Purchase Order created from the Project Planning Lines page

One of the key differences between this Purchase Order and a standard Purchase Order is that the Project and Project Task No. are populated on the Purchase Order Line. This link from the Purchase Order Line to the Project both (1) provides users with visibility from the Project that this Item has been ordered and (2) is used to control what happens when the Purchase Order is posted.

The Purchase Lines page run from the Project Planning Lines page to show PO visibility

In this scenario, the Purchase Order Receipt will be posted, and then the related Purchase Invoice will be posted so that the use of all "Interim" G/L Accounts can be included in the explanation of G/L journal entries. Alternatively, if the Purchase Order is posted using the "Receive and Invoice" posting option where both the receipt and invoice are generated at the time, the G/L Entries documented within this post are created in a similar manner, except without all of the "Interim" entries (because they are not needed).

A key takeaway here is that an Item ordered directly from the Project never becomes part of on-hand inventor quantity/value, but instead is consumed to the Project immediately upon receipt of the Purchase Order.

Purchase Order Receiving

When the Purchase Order is received, the Item is not only received against the Purchase Order to create a new Item Ledger Entry, but a "Negative Adjustment" Item Ledger Entry is also created to reflect that the quantity and value of this Item is not to be reflected in the value of on-hand inventory, but is to be consumed immediately as usage against Project No. J00110.

The Item Ledger Entries page showing the purchase and negative adjustment created during PO Receipt posting

Accordingly, the following G/L Entries are created during the Purchase Order "Receive" post. Although this is technically a single journal entry, it is effectively two separate G/L Entries as broken down here:

Entry #2

(Entry Nos. 8230 and 8231 below)

To record the Purchase of inventory and application to a Project during PO receipt posting

• Debit: General Posting Setup – “Inventory Account (Interim)”

  • Based on the Inventory Posting Group assigned to the Item and the Location Code set on the Purchase Order line.

  • Typically defined as an Asset type G/L Account.

• Credit: General Posting Setup – “Invt. Accrual Acc. (Interim)"

  • Based on the Gen. Prod. Posting Group assigned to the Item and the Gen. Bus. Posting Group assigned to the Vendor.

  • Typically defined as a Liability type G/L Account.

Entry #3

(Entry Nos. 8232 and 8233 below)

• Debit: General Posting Setup – “COGS Account (Interim)”

  • Based on the Gen. Prod. Posting Group assigned to the Item and the Gen. Bus. Posting Group assigned to the Vendor.

  • Typically defined as an Asset type G/L Account. (Yes, the caption of this setup field on the General Posting Setup page is misleading.)

• Credit: Inventory Posting Setup – “Inventory Account (Interim)"

  • Based on the Inventory Posting Group assigned to the Item and the Location Code set on the Purchase Order line.

  • Typically defined as an Asset type G/L Account.

Purchase Order Invoicing

In order to understand how the "Interim" entries are cleared and actual costs are posted, during the Purchase Invoicing process, the "Unit Cost" will be revised from the expected cost of $0.50 to $0.60.

Two new G/L Registers are created during the Invoice post: one with a Source Code of PURCHASES and another with a Source Code of INVTPCOST.

Entry #4

To record the payable due to the Vendor for the Item(s) received

This is the first of the two G/L Register entries created when the Purchase Invoice is posted.

• 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 #5

The G/L Register generated when Invoicing a Project-related Purchase Invoice

These entries above are all included in the second G/L Register when the Purchase Invoice is posted. Although these General Ledger Entry records are part of a single G/L Register, they are actually a set of four separate journal entries that can be broken down as follows to make more sense of what is happening and the end results as reported on the financial statements. We will review these entries in an order that is different than the order they appear in the General Ledger Entries page, again to make it easier to understand the entries.

Let's break Entry #5 down into four separate entries called 5a, 5b, 5c, and 5d:

Entry #5a

(Entry Nos. 8262 and 8263)

To reverse the expected cost entry created during the Purchase Order Receipt posting

• Debit: 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.

• Credit: 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.

Entry #5b

(Entry Nos. 8264 and 8265)

To record the actual cost of inventory per the actual invoiced amount

• 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.

Entry #5c

(Entry Nos. 8266 and 8269)

To reverse the expected cost posted to the Project upon Purchase Receipt posting

• Debit: Inventory Posting Setup – “Inventory Account (Interim)"

  • Based on the Inventory Posting Group assigned to the Item and the Location Code set on the Purchase Order line.

  • Typically defined as an Asset type G/L Account.

    
    

• Credit: General Posting Setup – “COGS Account (Interim)”

  • Based on the Gen. Prod. Posting Group assigned to the Item and the Gen. Bus. Posting Group assigned to the Vendor.

  • Typically defined as an Asset type G/L Account.

Entry #5d

(Entry Nos. 8267 and 8268)

To record the actual value of inventory applied to the Project per the actual invoiced amount

• Debit: General Posting Setup – “Inventory Adjmt. Account”

  • Based on the Gen. Prod. Posting Group assigned to the Item and no (blank) Gen. Bus. Posting Group.

  • Typically defined as a Cost of Goods Sold type G/L Account.

• Credit: Inventory Posting Setup – “Inventory Account"

  • Based on the Inventory Posting Group assigned to the Item and the Location Code set on the Project Journal line.

  • Typically defined as an Asset type G/L Account.

If we were to use our old "T-Accounts" to track the debits and credits posted to each G/L Account used in this scenario, we are left with only the following:

• Debit G/L Account 50010 (Purch. Account) - $60

  • Credit G/L Account 20100 (Accounts Payable) - $60

• Credit G/L Account 50101 (Inventory Adjustments) - $60

  • Credit G/L Account 50015 (Purchases Applied) - $60

There is obviously a lot of activity between these G/L Accounts, the end result is effectively a debit (or increase) for $60 to the COGS section of the income statement to reflect the usage of the Item against the Project and an off-setting credit (increase) to the A/P Liability account to reflect that the vendor is owed $60 for this Item.

A final point on the use of Project WIP. If Project WIP is not used, nothing further needs to be done as the system has already reflected the usage of the Items within the Cost of Goods Sold section on the Income Statement. However, if Project WIP is used, then what WIP posting will do is transfer the cost of the Items used from the Cost of Goods Sold section onto the Balance sheet as "Project WIP Cost" or as "Recognized Cost" (depending on the WIP Method used and the activity that has occurred within the Project.

While all of this G/L activity related to the usage of Items against Projects in Business Central appear to be more complicated than it needs to be, it is the combination of these entries that allow for a full reconciliation of the subledgers to the General Ledger as of any historical date. If the system is setup correctly and Financial Reports have been created to easily monitor the balances in these G/L Accounts, the end results are extremely powerful and impactful for your organization: Always-accurate and up-to-date Project profitability information and always-accurate and up-to-date set of financial statements.