When standard costing setups are made in Microsoft Dynamics, the process can be a little overwhelming — “item model group” and “item group” need to be defined, and a purchase order and a sales order must be processed. Then you need to create an invoice and review financial postings on the voucher form. Whew!
What do all these postings mean? Why there are so many? Where are these numbers coming from?
As a finance consultant at Columbus I get these questions all the time. Purchase order postings are especially hard to grasp. When using the standard costing inventory method, it’s important to understand that purchase order postings could result in purchase price variance. But how does it get calculated? And why is it debit or credit? I’ll guide you through standard costing sales orders and purchase order postings to help you master both.
Financial postings in Microsoft Dynamics AX and Dynamics 365 Finance and Operations (D365FO) always happen in a two-step process. This is true for sales orders and purchase orders.
In case of sales orders, the system records a decrease in inventory and an increase in accrued cost of goods sold (or any other account of your choice) when a packing slip is posted. Shipped inventory is no longer in the warehouse, but, depending on company processes, it could take some time for a sales order to be invoiced. Meanwhile your accounting records must reflect the business’ assets, liability, income, and expenses accurately. This is a reason for the first-step of financial posting on a sales order — posting a packing slip.
The second-step posting happens during sales order invoicing. It reverses the packing slip posting and posts a final financial transaction. To make the reconciliation process easier, I always suggest that my clients personalize the voucher form and add the field “posting type”. This helps to connect actual postings with the item group setup.
Keep in mind: Posting types were renamed in D365FO. All tables below have posting types for D365FO and AX 2012.
At the packing slip posting (the first-step posting for a sales order) the system multiplies an item’s cost — activated as a part of standard costing setup — by a shipped quantity.
At sales order invoicing (the second-step posting for a sales order) the system posts the following transactions:
- Reversal of the packing slip posting
- Final decrease in inventory and increase in cost of goods sold (item cost multiplied by shipped quantity)
- Revenue and accounts receivable increase (the system uses either a selling price from an item master/sales order or a price from a trade agreement multiplied by shipped quantity)
It’s important to note that a General Ledger account assigned to the posting type “packing slip offset” (AX2012) or “cost of units, delivered” (D365FO) will always zero out by the time a sales order invoice is posted. Sales order postings are the same regardless of the inventory costing method (FIFO, LIFO, moving average, standard costing).
Example of a sales order posting:
Toy manufacturer “W&Z” signed a trade agreement with a retail chain client for weekly sales of 100 little red wagons for $20 each. W&Z’s standard cost of each red wagon is $11. A sales order is created, shipped and invoiced in the system. The following T-accounts show sales order postings for a packing slip and invoice.
In the case of purchase orders, the first-step posting happens at the time of product receipt posting. Inventory is received in a warehouse, and accrued liability is recorded. It can take anywhere from a few days to a few months to receive an actual vendor invoice, but the accounting records must be accurately updated with the received inventory and accrued liability.
The second-step posting for a purchase order occurs when a vendor invoice is received and posted for a purchase order, product receipt postings are reversed, and final transactions are posted.
Two accounting entries are posted for the product receipt. The first one accrues a liability for products received (item purchase price multiplied by quantity received).
The second entry records a cost of inventory received (item cost multiplied by quantity received). If the item purchase price differs from the item cost, the difference — multiplied by quantity received — is posted to the purchase price variance account. If an item cost is higher than an item purchase price, the purchase price variance account is credited. If an item cost is lower than an item purchase price, the purchase price variance account is debited.
As a result of the product receipt posting, a GL account for the posting type “purchase expenditure, un-invoiced” will zero out, leaving product receipt postings with Debit Inventory, Credit Accrued Liability and possible PPV.
It’s important to mention that if the amount for both accounting and reporting currency adds up to zero per voucher, then currency code, ledger dimension, and accounting entries for “purchase expenditure, un-invoiced” will not be transferred to GL.
Purchase order invoice postings add a bit more complexity to the financial posting reconciliation. The system posts two accounting entries, just as it does in the product receipt posting:
The first entry reverses the accrued liability from the product receipt posting, and records an actual liability to the vendor.
The second entry reverses the recorded cost of inventory from the product receipt posting, and posts the actual cost of inventory.
As a result of the purchase order invoice posting, GL accounts for the posting type “purchase expenditure, un-invoiced” and “purchase expenditure for product” will zero out.
Example of a purchase order posting:
Toy manufacturer “W&Z” purchases 400 plastic wheels for $.5 each. W&Z’s standard cost of each plastic wheel is $.7. A purchase order is created, received, and invoiced in the system. The following T-accounts show purchase order postings for a product receipt and invoice.
Keep in mind: If you post these transactions in the system, purchase price variance transactions won’t be displayed in the purchase order invoice voucher transactions form. This is because the purchase price variance account is debited and credited for the same amount ($80.00) and both account entries are within the same journal. I included these transactions in my T-account example.