Financial postings in Dynamics AX/ Dynamics 365 for Financials and Operations – Part 1

This has been one topic that I have been longing to blog about. Different financial postings in Dynamics AX/Dynamics 365. Back in the future when I began my career as a financial consultant, I had struggled to explain the accounting entries to customers, especially the finance team. They would keep asking different questions why it has to be a P&L account and why not a Balance sheet account. How would these entries get nullified? What happens if we don’t set them up. Well, I have been all through that, and based all such experiences I wanted to blog them up here and explain what I understood through out encounters and experiences. Microsoft also has to be appreciated here as they have taken a step further and are trying to get to the terminology used usually.

Before I begin, I wanted to mention a few things and a few tips  here:

  1. Although I would give some overview about the financial terms and what account needs to be used where, considering the length and the area that I’d have to cover I may skip the basic explanation about what a balance sheet account is, what is a profit and loss account etc. My friend Satya Kejriwal is planning on an accounting book and you can read his blog post here – https://www.linkedin.com/pulse/accounting-scary-subject-do-you-want-dynamics-365-yes-kejriwal-pmp-?trk=v-feed&lipi=urn%3Ali%3Apage%3Ad_flagship3_profile_view_base_recent_activity_details_shares%3BM2T5txYIoclKnY5HqN48Aw%3D%3D&lipi=urn%3Ali%3Apage%3Ad_flagship3_profile_view_base_recent_activity_details_shares%3BIPO9vht5Sv2Cc%2Bojp4QqRg%3D%3D . And if you want more basic accounting knowledge, you can go through the link here – https://www.accountingcoach.com/accounting-basics/outline
  2.   One important tip to consultants is, avoid terminology like Invent Posting, Summary account etc. I learned this the hard way myself and mentioned it to many people who have worked with me. One good example that I have read is in “Microsoft Dynamics AX Implementation Guide” by Yogesh Kasat and JJ Yadav. Below it is. So try to follow this as much as possible and hopefully my blog will help you to get there.

20170710_202715

3. This would be a multi-post blog and mostly the emphasis would be the usual ones like P2P, O2C, Fixed Assets, Inventory accounting, and Manufacturing accounting.  However, there would be more scenarios where there could be more questions. If there is anything that any of the readers feel it is left over, or want to know about it, please do send me a note and I would be happy to update about it.

4. In the entire post I would be referring Dynamics 365 for Financials and Operations as Dynamics 365 simply. This is for convenience and also I would be indicating where possible Dynamics AX as well, as it would help people who are implementing Dynamics AX 2012 and need any details around this.

Without any further delay let me jump into the first section, that is P2P or Procure to Pay.

Procure to Pay

Procure to pay (purchase to pay or P2P) is the process of obtaining and managing the raw materials needed for manufacturing a product or providing a service. In any organization procurement can be of 2 types, direct and indirect. While the direct procurement deals with the products and services which are related to direct revenue generating mechanisms for the organization, indirect procurement is related to internal organizational requisitions for services and equipment. Example of a direct procurement can be for a juice manufacturing company to procure fruits as the raw materials. Whereas within the same organization there can be requests for procuring computers, hardware or services related to the plant, machinery and any other miscellaneous products and services which are not directly contributing to the revenue generation process of the organization. Such procurement is termed as indirect procurement.

Below is a high level process flow for procure to pay and the processes wherever there is an accounting impact.

Procure to Pay Accounting

Note: If you are implementing for a public sector company, you will be requested for accounting entries during Purchase Requisition and Purchase order creation. We would look at such examples in the “Miscellaneous/Good to know” section later on.

As we identified in the flow above, the first point of accounting entries in Dynamics 365/Dynamics AX is at the point of “Receipt”. Let us look at some of the samples of accounting entries for receipt.

Note: Accounting entries for product receipt would only be posted when the Accounts Payable parameter Post product receipt in ledger is marked along with; for categories Accrue purchase expense on receipt under Purchasing policy; for stocked items’ model group(s) Post physical inventory is marked under the model group; for non-stocked items’ model group(s) Accrue liability on product is marked.

Receipt Accounting in case of stocked products

This set of accounting entries talk about when the goods are being stocked in the inventory and the subsequent accounting which happen, due to the nature of the goods.

Account Account Name Transaction type in Dynamics 365 Transaction type in Microsoft Dynamics AX 2012 Debit Credit
Balance Sheet Inventory received, un-invoiced Cost of purchased materials received Product receipt X  
Balance Sheet Accrued purchases Purchase Accrual Purchase Accrual   X

Explanation of the accounting entry:

  1. Cost of Purchased materials received: Meaning the cost of the items that have been physically and systematically recognized. This account is also usually accounted under the Inventory family of the Chart of accounts as this is the value of the goods that you have physically recognized. As this is an asset to the company, this will be on the Debit side of the accounting.
  2. Purchase accrual:  A brief description of Accrued Liabilities from Wikipedia “Accrued liabilities are liabilities that reflect expenses on the income statement that have not been paid or logged under accounts payable during an accounting period; in other words, obligations for goods and services provided to a company for which invoices have not yet been received. Examples would include accrued wages payable, accrued sales tax payable, and accrued rent payable.” In this case, we have received the goods from the vendor, while the vendor has not formally requested for the payment to be done in form of an invoice. However, in such cases, the liability will have to be accounted and this is usually accounted as an Accrual. In case of the goods being received, this will be recognized under Purchase Accrual transaction type in Dynamics 365.

 

In the next post, we shall take a look at the accounting entries upon product receipt for non-stocked items and continue on the other accounting in the Procure to Pay space.

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