This is related to follow-up completed in review of the case and emailing the guidance. The below information describes some of the concepts covered and detailed guidance:
Before answering the question related to the accounts and expected entries, it must first be noted that within Inventory Setup, there are two options related to Posting to the G/L that must be taken into consideration. The two options are – Automatic Cost Posting (ACP) and Expected Cost Posting (ECP):
Automatic Cost Posting (ACP) means that the G/L is updated immediately upon posting an Inventory related transaction. If this is not enabled, then a user would use the batch posting process called Post Inventory Cost to G/L. The reason a company may want to use the periodic batch process is that it allows for posting summarized totals to the G/L by Posting Date, Dimension combination, Transaction Type, etc. rather than posting each individual Value Entry. With ACP, which is enabled by checking the box, an entry is posted for the transaction related to inventory immediately. Thus, you get a lot more G/L Entries because every Value Entry is posted individually. I think many people turn ACP on because they don’t want to think about the value updates to the G/L, but rather have it automated. The key is that the system gives an option and control to the company and allows the company to make a decision on how the G/L Entries are created.
Expected Cost Posting (ECP) is related to Automatic Cost Posting and will be impacted by that setting, but ECP specifically controls whether a company wants all accrual entries to be posted. When you receive a Purchase Order or Ship a Sales Order, the Value Entries store the value in the Cost Amount (Expected) field in Table 5802 – Value Entries. If a company wants these accrual entries posted, then they would enable Expected Cost Posting. For some companies, the extra entries are not desired. Once the Posting of the Invoice occurs, the system shows a reversing of the Cost Amount (Expected) and recording of the Cost Amount (Actual).
Now, assuming both selections are enabled, the following are posted:
On the Purchase Order (PO) side, you would have the following posting flow:
Receipt of Inventory on Purchase Order (PO) without having the Vendor Invoice yet.
DR – Inventory (Interim) - Inventory Posting Group
CR – Inventory Accrual Acct. (Interim) – General Posting Setup – this would be setup to an accrued liability account
Invoice from Vendor is received and posted
DR – Inventory Accrual Acct. (Interim) – General Posting Setup
CR - Inventory (Interim) - Inventory Posting Group
(To Reverse Accrual Posted on Receipt when Invoicing is completed)
DR – Purchase Account – General Posting Setup
CR – Accounts Payable (A/P) – Vendor Posting Group
DR – Inventory Account – Inventory Posting Group
CR – Direct Cost Applied Account – General Posting Setup
Note: Purchase and Direct Cost Applied are an offset posting. Basically, I refer to the Cost of Goods Sold statement used as a supporting schedule for the Income Statement. You have the following:
Beginning Inventory XX,XXX,XXX.XX
Plus: Purchases XX,XXX,XXX.XX
Other Capitalized XX,XXX.XX
Equals: Total Goods Available for Sales XXX,XXX,XXX.XX
Minus: Ending Inventory (XX,XXX,XXX.XX)
Equals: Cost of Goods Sold XXX,XXX,XXX.XX
BC and NAV have always posted the Invoicing of a Purchase Order to Debit a Purchase Account to reflect the new Purchase and then Credit Direct Cost Applied to move the value from Purchase Expense into Inventory. For many people, they don’t like this extra posting. However, it facilitates creating this reporting schedule that supplements the Income Statement. Some companies use same account for Purchase and Direct Cost Applied to manage the wash/flow through the Cost of Goods Section of the Income Statement. Please note that the Purchase Credit Memo Account would just be used as an alternative Purchase Account if the company wants to break out the negative Purchase value when a Purchase Return/Credit Memo is posted. Typically, I would think that the same Purchase Account would be used. The Overhead Applied Account deals with the “Other Capitalized Cost” to manage inventory capitalization. On the Item Card, you have two fields: Overhead Applied and Indirect Cost Percentage. The Overhead Applies is a per/unit Dollar Amount. The Indirect Cost Percentage is a percentage of the purchase cost. When looking at the standard invoicing entry, you would see:
DR – Purchase Account – General Posting Setup
CR – Accounts Payable (A/P) – Vendor Posting Group
DR – Inventory Account – Inventory Posting Group
CR – Direct Cost Applied Account – General Posting Setup
Added entry with Overhead:
DR – Inventory Account – Inventory Posting Group
CR – Overhead Applied Account – General Posting Setup
Basically, the Overhead Applied is a contra-expense account. We are capitalizing G&A cost into Inventory Value and flowing that through Cost of Goods Sold when the Item is Sold. In the Value Entries, you will see a separate Value Entry for the Direct Purchase Cost and the Overhead has a Value Entry Type of Indirect Cost, respectively.
On the Sales Order (SO) side, you would have the following posting flow:
Shipment of Inventory on Sales Order (SO) without posting the Customer Invoice.
DR – COGS (Interim) - General Posting Setup –Asset account to reclassify out of regular inventory and record inventory that is in route to the customer. Shipped inventory is removed from the Inventory Value, so this needs to be outside of the Inventory Account structure in the Chart of Accts.
CR – Inventory (Interim) – Inventory Posting Group
Invoice Customer on Sales Oder for already Shipped goods
DR – Inventory (Interim) - Inventory Posting Group
CR - COGS (Interim) – General Posting Setup
(To Reverse interim posting on Shipment when Invoicing is completed)
DR – Accounts Receivable – Customer Posting Setup
CR – Sales – General Posting Setup
DR – Cost of Goods Sold Account – General Posting Setup
CR – Inventory Account – Inventory Posting Group
With sales of inventory, BC and NAV use an Adjust Cost Item Entries process (Or Automatic Cost Adjustment Setting in Inventory Setup to call this during posting) to adjust the Sales’ cost to match the correct cost based on the costing method being used. For example, when a posting of a Sales Shipment and Invoice is completed, an Item Ledger Entry (T-32) is created, the linked Value Entry (T-5802) is created, and the FIFO layer is posted and linked in the Item Application Entry Table (T-339). The system will create the original Value Entry for the Shipment using the Unit Cost ($) on the Sales Line as the original cost, which defaults from the Item Card or Stockkeeping Unit Card, depending on Item setup. Then, the adjustment process will create a new Value Entry to adjust the cost to the final cost to match the FIFO layer applied to, for example. The cost adjustment through Adjust Cost Item Entries is completed from (Departments > Financial Management > Inventory under the Tasks > Costing section). In Inventory Setup (Departments > Warehouse > Administration > Inventory subsection > Inventory Setup), there is an option for Automatic Cost Adjustment based on a period setting. If set to ‘Always’, the system automatically adjusts costs on sales during the posting process. The challenge is that this can impact posting performance because the cost adjustment locks tables that may prevent other users from posting. In smaller companies with lower volume of posting, the option works. For larger companies, the Adjust Cost is typically setup to run overnight through the Job Queue setup to prevent impacting normal postings.
The cost adjustment process completes two primary processes – it creates the Value Entry for the adjustments to Item Ledger Entries (Sales, Negative Adjustments and other entries that need to be adjusted). In addition, it recalculates the Unit Cost ($) on the Item Card and Stockkeeping Unit Card based on the remaining Value and Quantity. The cost adjustment also deals with cost changes due to the posting of changes in cost, such as posting an Item Charge for Purchase Freight applied to a Purchase Item Ledger Entry where the inventory has already been sold. The Adjust Cost will push the cost through the Purchase and out to the applied Sales transactions. Adjust Cost Item Entries is also going to adjust the final Output Cost on Finished Production Orders, for example. I’ll avoid that discussion for now, because Manufacturing adds a whole other layer of complexity and posting. We can tackle that one once we get some of the more fundamental concepts mapped out.
For Assembly Order
The posting is relatively basic:
Assembly Components:
DR – Inventory Adjustment Expense (General Posting Setup) - Expense account to reclassify out of regular inventory and record reduction
CR – Inventory – (Inventory Posting Group) - reduce Assembly Component inventory
Assembly Output:
DR – Inventory – Inventory Posting Group - Increase Assembly Output inventory
CR – Inventory Adjustment Expense (General Posting Setup) - Expense account to reclassify in regular inventory and record increase in value for material consumption of Assembly Components.
CR – Direct Cost Applied (General Posting Setup - assigned General Product Posting Group to a Resource used as Labor on Assembly) – Reduces Expense Account – used to reclassify Labor Cost from Resources into the value of Assembly Output
CR – Overhead Applied Account (General Posting Setup) - Reduce Expense account to reclassify Overhead Expense cost into the value of Assembly Output
NOTE: The Inventory Adjustment Account is almost like a Work In Process flow through Account in the Income Statement for Assembly. In Design, because Assembly Items are “Instant Production” – unlike Manufacturing where this Work In Process (WIP) due to longer manufacturing cycle – the system instantly consumes Assembly Components and posts the Assembly Output. In the end, the net effect will be zero if the only Assembly BOM lines are Items. As shown above, if there is Labor or Overhead, there may be additional costs allocated to the Assembly Output value.
For Physical Inventory Journal Posting:
Negative Adjustment to reduce Inventory:
DR – Inventory Adjustment Expense (General Posting Setup) - Expense account to reduce regular inventory and record reduction
CR – Inventory – (Inventory Posting Group) - reduce Inventory Balance Sheet
Positive Adjustment to increase Inventory:
DR – Inventory – (Inventory Posting Group) – Increase Inventory Balance Sheet
CR – Inventory Adjustment Expense (General Posting Setup) – Reduce Expense account because our physical inventory shows that more are in stock than recorded
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