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Question regarding GL 8899 changes in trade goods

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Posted on by Community Member Microsoft Employee

Hello all,

We are currently setting up business central dynamics for a trading organization. The business is simple, we purchase goods and sell them with a mark-up.

I have a lot of trouble understanding the line item "Changes in trade goods" or GL 8899. This line item is shown in the chart of accounts. In addition, it is part of "Income" in the revenue section of the profit and loss statement. This seems incorrect to me.

My questions:

1) how should I interpret the changes in trade goods?

2) And why is it shown as part of revenue/income in the profit and loss statement? This seems to be a double count.

I really need a detailed understanding of this line item in order to be able to explain it. This also means I would like to understand why this line item even exists, whether it is needed and whether it can be turned off.

I included example images below to show what I mean.

1: photo of chart of accounts - changes in trade goods = 542,391.80 = reflects all purchases made

Changes in trade goods increases when I post a purchase invoice. Cost of goods sold only increases with the same amount once the item is sold.

2: photo of chart of accounts - cost of goods sold = reflects value of items sold (COGS)

Total cost of goods sold is 496,565.60.

3: photo of chart of accounts - revenue

Total revenue is 664.261,90

Based on the chart of accounts, I expect the following for the P&L:

Revenue 664,261 -/- cogs 496,565 = gross profit of 167,696

If I print the profit and loss statement, changes in trade goods is included as part of income. See below.

Why would changes in trade goods be included as part of income ?

Why does it exist ? I think you only need: creditors and inventory, cost of goods sold and that's it. The changes in trade goods seems to be a double entry for inventory purchases. Including that as part of income seems to be completely wrong.

Please help me understanding this:)

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Gavin 2,337 on at

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RE: Question regarding GL 8899 changes in trade goods

Hi,

We have done this one of two ways:

1) Make the direct cost applied account the same as the purchases account in the General Posting Setup. This way when you post a purchase invoice the GL postings debit and credit the same account.

2) Have separate accounts for direct cost applied and purchases. They will still contra each other off either immediately when posting the Purchase Invoice or if you have the option "Automatic Cost Posting" switched off in "Inventory Setup" later when you run "Post Inventory Cost to G/L"

With regards have do I make use of direct cost applied I'd say no. This is because I always set the option "Automatic Cost Posting" to ON in the "Inventory Setup" page.

As I mentioned previously with this setting ON the inventory posting and purchases posting happen at the same time so direct cost applied and purchases should contra off against each other.

If you had a situation where the option "Automatic Cost Posting" was OFF you'd only get the purchases side of the GL entries therefore you'd have a balance in the Purchases on the chart of accounts. i.e. the GL postings would be:

DR Purchases (P&L)

CR PL Control (Balance Sheet)

**As you can see no Inventory posting

Therefore you'd have an expense on the P&L until you ran the routine "Post Inventory Cost to G/L" which would do the Inventory side of the GL entries i.e. the GL postings would be:

DR Inventory (Balance Sheet)

CR Direct Cost Applied (P&L)

At this point if the Purchases and Direct Cost Applied were the same account they would contra off.

Maybe others reading this will have other ideas about the direct costs applied. I've always found it a strange one and as I mentioned I think the system only makes use of it to support the ability to split out the Inventory postings from the Purchase postings on an Invoice. (maybe I'm wrong but I can't find much information out there on this so I've had to come to my own conclusions which I explained in the blog post I wrote and referred to earlier)

Hope this helps

Thanks

Gavin
Community Member Microsoft Employee on at

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RE: Question regarding GL 8899 changes in trade goods

Dear Gavin,

Thanks - it finally starts to make sense why it exists. Your example was very clear.

Indeed, I see that we also have direct cost applied accounts tied to the purchase account.

As you seem to use the direct cost account as well, how do you structure the profit and loss statement? Currently, the direct cost account is shown in the P&L as part of income. Do you see that in your system as well?

And perhaps a second question, do you still make use of the direct cost account? and why?
Gavin 2,337 on at

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RE: Question regarding GL 8899 changes in trade goods

Hi,

I could be wrong but I suspect this is the "Direct Cost Applied" posting.

Normally when you post a Purchase Invoice for "Inventory" you'd expect these postings

DR Inventory

CR Creditors Control

However in business central you get the following postings

DR Inventory

CR Direct Cost Applied

DR Purchases

CR Creditors Control

The GL codes for the "Direct Cost Applied" and "Purchases" can be found in the "General Posting Setup". Is this the account you are seeing entries in?

You can set them to be the same so they offset one another.

For more details on why these are posted I wrote a blog post here https://thedynamicsexplorer.com/tag/direct-cost-applied/

As a little more detail if you look at the "Source Document" for the GL entries for a Purchase Invoice you can see they are split into two different codes. One is INVPTCOST and the other PURCHASES

This is because Business Central splits out the Inventory and Purchases part of the GL entries. It does this to accommodate the "Automatic Cost Posting" option in the GL. (i.e. you can switch off the inventory GL postings and do them via a batch job at a later date. In order to accommodate this BC splits out the GL postings to inventory and purchases types. It uses the direct cost and purchases GL entries to balance those journals)

I hope this helps

Thanks

Gavin
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MahGah 15,419 on at

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RE: Question regarding GL 8899 changes in trade goods

By disappear you mean delete the account? if you update Account Schedule logic it has no effect on actual account. But You can try it as well. When you click on M-income you can create a new M-income under new name (like M-Income-D) then edit the M-Income-D and then in M-Income-D Report -> Print and you will see this new name. Then you can use Print the report and check. Then check the actual account to make sure it is there.

Also, see below flow chart for posting item in BC. You can check Inventory Posting Setup and General Posting Setup to match with the flow. This way you can see why that account being used, how get debit/credit etc.

I hope this help
Community Member Microsoft Employee on at

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RE: Question regarding GL 8899 changes in trade goods

Dear MahGah,

I understand that you can change the structure of the PL in the general ledger setup. However, removing it from the P&L structure does not make it disappear, right?
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MahGah 15,419 on at

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RE: Question regarding GL 8899 changes in trade goods

Hi

Can you please check a few things first

1) Please go to General Ledger Setup and see which report uses for income statement.

2) Then go to Account Schedule and find the same report

3) Then click on it to open. Say NO to copy question. Here you can see which accounts and which formula used to calculate the Income Statement. This way you can review how your system setup to calculate income statement. You should find that account here. This is an organization decision to how set this report up. Talk to your accounting and find out why they included this account here.