Inventory costing and accounting entry explanation

Chapter III: Inventory Accounting
4. Inventory Accounting
ACCOUNTING EXPLANATION & HOW TO USE MS DYNAMICS AX 2012 R3 P a g e | 71
UNDERSTANDING DYNAMICS AX ACCOUNTING FRAMEWORK
Before learning the necessary setups of Inventory Posting, we shall consider some
changes in accounting rules of inventory purchase order between versions AX 2009,
AX 2012 up to AX 2012 R3.
In accounting methods of inventory, there are differences between methods of
valuing inventory, for example between the weighted average inventory model and
the standard cost inventory model. The standard cost method is often applied in
manufacturing enterprises. In this book, the weighted average method is focused on.
Let’s find out the difference in accounting methods between two versions Dynamics
AX 2009 and 2012, through a simple of purchase order transaction (assuming that
taxes and purchase fees are excluded):
AX 2009 version and older:
Debit Purchase packing slip
Credit Purchase packing slip offset
AX 2012 & AX 2012 R3 versions:
Debit Purchase expenditure, un-invoiced
Credit Purchase, accrual
At the same time
Debit Product receipt
Credit Purchase expenditure, un-invoiced
After adjustment, if purchase expenditure, un-invoice account is balanced,
the system will not post this entry into the ledger. Hence, essentially, the
purchase order is reflected as follow:
Debit Product receipt
Credit Purchase, accrual
When posting purchase order receipt into the warehouse, the system will book:

So far, we will wonder: What does Purchase expenditure, un-invoiced mean? Let’s
examine the period of posting invoice to clarify the question.
AX 2009 version and older:
Accounting entry is reversed to clear the purchase accrual:
Debit Purchase packing slip offset
Credit Purchase packing slip
At the same time, accounting entry records the inventory receipt and account
payable (vendor balance):
Debit Purchase receipt
Credit Vendor balance
AX 2012 & AX 2012 R3 versions:
Accounting entry is reversed to clear the purchase accrual:
Debit Purchase, accrual
Credit Purchase expenditure, un-invoiced
Debit Purchase expenditure, un-invoiced
Credit Product receipt
At the same time, accounting entry records the inventory receipt and account
payable (vendor balance):
Debit Purchase, inventory receipt
Credit Purchase expenditure for product
Debit Purchase expenditure for product
When posting purchase order invoice, the system will book as follow:

After adjustment, if purchase expenditure, un-invoice account is balanced,
the system will not post this entry into the ledger. Hence, essentially, the
purchase order invoice is reflected as follow:
Debit Purchase, accrual (reversal)
Credit Product receipt (reversal)
Debit Purchase, inventory receipt
RARE EXAMPLE 1: INVENTORY COSTING AND ACCOUNTING ENTRY EXPLANATION
In most of the cases, the balance of the purchase expenditure, un-invoiced and
expenditure for product is always zero. However, let's look at some cases in which
the balance of the two types of accounts will not be zero.
The scenario in this example is made more complicated than usual to facilitate
consideration of many aspects. This example does not include taxes and purchase
fees and is described as follow:
Suppose, the enterprise has purchased 2 items (assuming that taxes and purchase
fees are excluded): A1001 with unit price is $700. The provider has delivered the
items and they are stored for quality control. In the waiting and handling processes,
the receipt is posted and the invoice is not yet posted. Meanwhile, employees in
logistics department accidentally ruin one item A1001 not belong to this shipment.
Coincidently, the shipment has one unqualified item. The enterprise will return one
to the provider and pay only for the qualified one. For the broken item, they have to
record as expenses.
Let’s see in detail how Dynamics AX 2012 R3 handles the data for the above example
through 4 processing actions.
Set up requirement parameters to carry out this example on the system:
• Post product receipt ledger has been activated.
• Post physical inventory has been activated.
• Included physical values have been activated.

ACTION PROCESS 1
After posting receipt to bring items to the warehouse, the data of item A1001 at this
time is presented in the below table:
Total physical
value
Total financial
value
Total physical
Qty
Total Qty
posted
Total Qty
received
14,400 112,518 227 205 22
Explanation:
• Total physical quantity including invoiced and un-invoiced : 227
• Total Quantity which was previously invoiced : 205
• Total financial value of quantity which was invoiced : 112,518
• Total quantity of items not yet invoiced : 22
Including
o 2 items in the above example
o 20 items in other purchases, posted receipts but not yet invoiced
• Total value of un-invoice items : 14,400
Including
o 1,400 = unit price 700 x 2 Qty (in the above example)
o 13,000 = unit price 650 x 20 Qty (in other purchases, posted receipts
but not yet invoiced)
• Average estimated cost price at this time : 559.11
o Avg. estimated cost price = (Total physical value + Total financial
value) ÷ Total physical Qty
o 559.11 = (14,400 + 112,518) ÷ 227

ACTION PROCESS 2
While the invoice has not yet been posted, one employee in logistics department
broke one item belong to previous shipment. The staff uses function of Inventory
Adjustment Journal to record this expense.
FIGURE 4.3 INVENTORY ADJUSTMENTS – VOUCHER TRANSACTIONS
At the time of posting Inventory Adjustment, the data of item A1001 is presented as
followed:
Total physical
value
Total financial
value
Total physical
Qty
Total Qty
posted
Total Qty
received
14,400 111,958.89 226 204 22
At this point of time, there are some changes in the inventory data
o Total financial value: has been reduced by a number corresponding to the
value of inventories at the time of posting inventory adjustment:
111,958.89 = 112,518.00 – 559.11
o Total physical Qty: 226, has been reduced by 1
o Total Qty Posted: 204, has been reduced by 1
o Total Qty Received: unchanged
o Total physical value: unchanged
o Average estimated cost price at this time: 559.11, unchanged

FIGURE 4.4 INVENTORY DATA OF ITEM A1001
ACTION PROCESS 3
Because the quality inspection department reported that there was one item
unqualified, the enterprise decided to return that item and pay only for the qualified
item. The vendor retrieved the invoice and issued a new one for this shipment.
Before posting the invoice, the staff posts negative receipt for one item on purchase
order to decrease one item in inventory. This is adjusted before the invoice is
posted. After negative receipt posting for one item, the data of A1001 is represented
as follow:
FIGURE 4.5 SUBLEDGER VOUCHER OF THE FIRST RECEIPT POSTING

FIGURE 4.6 SUBLEDGER VOUCHER OF THE SECOND RECEIPT POSTING, NEGATIVE
POSTING
Combine the two above sub ledger vouchers
o Product receipt: 840.89 = 1400 – 559.11
o Purchase expenditure, un-invoiced: 140.89 = 700 – 559.11
o Purchase, accrual: 700 = 1400 – 700
More explanation
At this time, Purchase expenditure, un-invoiced has balance which is the difference
between unit price of $700 and estimated cost price of 599.11 when posting
negative receipt.
The data of item A1001 at this time is presented as follow:
Total physical
value
Total financial
value
Total physical
Qty
Total Qty
posted
Total Qty
received
13,840.89 111,958.89 225 204 22
Deducted: -1
At this point of time, the data has some changes
o Total financial value: unchanged
o Total physical Qty: 225, continue to be decreased by 1
o Total Qty Posted: unchanged, however the system record “Deducted: -1”
o Total Qty Received: unchanged
o Total physical value: decreased by an amount corresponding to the value of
inventory at the time of posting inventory adjustment:
13,840.89 = 14,400 – 559.11
o Average estimated cost price at this time: 559.11, unchanged

ACTION PROCESS 4
Finally, the accountant posts invoice for that purchase order with the total value to
be settled is $700 which is already adjusted.
FIGURE 4.8 SUBLEDGER VOUCHER – INVOICE

TABLE 4.1 SUBLEDGER VOUCHER – INVOICE
Sub ledger
journal Posting type
Ledger
account Curr. Debit Credit Journal Desc.
G_18000042 Product receipt 14200 USD 1400 0
Generated by
receipt
posting
G_18000042
Purchase expenditure, un-
invoiced 00002 USD 0 1400
G_18000042
G_18000042 Purchase, accrual 34100 USD 0 1400
G_18000043 Product receipt 14200 USD 0 559.11
Generated by
receipt
reverse
posting
G_18000043
invoiced 00002 USD 559.11 0
G_18000043
G_18000044 Vendor balance 33100 USD 0 1400
Generated by
invoice
posting
G_18000044 Vendor balance 33100 USD 700 0
G_18000044
Purchase expenditure for
product 00001 USD 0 700
G_18000044
product 00001 USD 1400 0
G_18000044
product 00001 USD 0 840.89
G_18000044 Product receipt 14200 USD 0 840.89
G_18000044
invoiced 00002 USD 840.89 0
G_18000044
G_18000044
G_18000044 Purchase, inventory receipt 15100 USD 840.89 0
After combining the three above sub ledger voucher:
o Product receipt: cleared
o Purchase, accrual: cleared
o Purchase expenditure, un-invoice: cleared
o Vendor balance: 700 (Credit)
o Purchase expenditure for product: 140.89 (Credit)
o Purchase, inventory receipt: 840.89 (Debit)

CONCLUSION
Finally, the difference of 140.89 is transferred from Purchase expenditure, un-
invoiced to Purchase expenditure for product and posted to ledger.
FIGURE 4.9 PURCHASE EXPENDITURE, UN-INVOICED IS POSTED INTO LEDGER
FIGURE 4.10 PURCHASE EXPENDITURE FOR PRODUCT IS POSTED INTO LEDGER

The data of item A1001 at this time is presented in this table:
Total physical
value
Total financial
value
Total physical
Qty
Total Qty
posted
Total Qty
received
13,000.00 112,799.78 225 205 20
Deducted: 0
At this time, the data has some changes:
o Total financial value: increased by the value of the inventory which is invoiced
112,799.78 = 111,958.89 + 840.89
o Total physical Qty: unchanged
o Total Qty Posted: increased 1, and Deducted -1 is deleted
o Total Qty Received: decreased by 2
o Total physical value: decreased by the value of the inventory which is
invoiced at the time of posting invoice: 13,000 = 13,840.89– 840.89
o Average estimated cost price at this time: 559.11 unchanged

SUMMARY
Whether action process 2 happens or not will not make purchase expenditure un-
invoiced have balance but the negative receipt posting for returning the broken item
does. This balance is the difference between purchase unit price and inventory
averaged price cost. As a result, purchase inventory receipt has to add this difference
of $140.89 to the unit price of $700. The offset account – purchase expenditure for
product has to record that difference.
In the example, the purchase expenditure for product has a credit balance of
$140.89. It seems to be difficult to understand. However, according to accounting
rules, it is an indirect number which helps to decrease the cost of goods sold and vice
versa, a debit balance will increase the cost of goods sold. Therefore, the term
“Expenditure” was used in Purchase expenditure, un-invoice and Purchase
expenditure for product.
The book “Financial and Managerial Accounting in ERP System Microsoft Dynamics
AX 2012 R3”
Published at Amazon:
https://www.amazon.com/dp/B01MD0HVZN/

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