Hi,
I've always found these entries interesting so here are my thoughts.
I'd first say that I always set them as Income statement accounts. The Purchase acts as a Debit and the Direct Cost Applied as a balancing Credit. (some users set them the same but I think its best to use different GLs)
As to why they exist my thoughts have evolved over time. Before I used Business Central I'd never come across these additional entries when posting Inventory?
For example when receiving Inventory in Dynamics GP the system posts a Debit to Inventory and a Credit to a Goods Received Not Invoiced code. Alternatively if receiving and invoicing for inventory at the same time, Dynamics GP posts a Debit to Inventory and a Credit to Accounts Payables. This is exactly what I'd expect therefore I was very puzzled by these additional "Purchases" and "Direct Cost Applied" entries in Business Central.
My first thought is they exist to enable the option "Automatic Cost Posting" in the Inventory Setup to actually work. I'm not sure if you know of this option but it gives you the ability to switch off Inventory postings to the GL. Therefore without the additional "Purchases" entry this wouldn't work i.e. if you switch the option "Automatic Cost Posting" off in Inventory Setup and post a Purchase Invoice for Inventory you get the entries Debit Purchases Credit Accounts Payable. Therefore without the "Purchases" debit entry this GL posting wouldn't work. I have more details on this in a blog I wrote here https://thedynamicsexplorer.com/tag/direct-cost-applied/
However since I've been looking into the accounting side of things I can see that by having the "Purchases" debit entry you can also manually calculate a Cost of Goods Sold. i.e. you can take the beginning balance of Inventory and then add the balance in the "Purchases" GL code minus your Ending Inventory.
I hope this helps.
Thanks
Gavin
