Inventory Setup in Business Central – Step-by-Step, With Interim Accounts Explained
This guide provides a precise, practitioner-focused walkthrough of core Inventory Setup parameters in Microsoft Dynamics 365 Business Central, how they influence costing and postings, and exactly how Interim (expected cost) accounts work—complete with posting flows, month-end checklists, and reconciliation tips.
1) What Inventory Setup Controls
Inventory Setup defines how the system treats item costs and postings across daily operations. The most impactful controls are listed below with recommended, audit-friendly settings.
| Field | Purpose | Recommended Setting (Typical) | Notes |
| Automatic Cost Posting | Posts inventory cost adjustments to the G/L automatically as they occur. | On (Enabled) | If disabled, you must run Post Invt. Cost to G/L periodically. |
| Expected Cost Posting to G/L | Posts expected cost entries for receipts/shipments before invoicing into interim G/L accounts. | On (Enabled) | Required to reflect received-not-invoiced and shipped-not-invoiced at period end. |
| Automatic Cost Adjustment | Controls when item costs are adjusted (e.g., for inbound variances) and pushed to value entries. | Always or Daily | Higher frequency reduces month-end surprises; Always has highest system load. |
| Average Cost Calc. Type | Scope for average cost calculation. | Item | Use "Item & Location & Variant" if you need per-location/variant averages. |
| Average Cost Period | Time bucket used for average cost calculation when costing method = Average. | Month (common) or Day | Shorter periods track cost changes more precisely but can be more volatile. |
| Location Mandatory | Requires a Location Code on item transactions. | On (Enabled) | Prevents posting without a warehouse/location assignment; improves auditability. |
| Prevent Negative Inventory | Blocks postings that would take on-hand below zero (per setup granularity). | On (where operationally feasible) | If you allow negatives, ensure tight cycle counts and backdating controls. |
| No. Series (Items, Posted Receipts/Shipments, Transfer Orders, etc.) | Defines numbering for master data and documents. | Configured & Locked | Use separate series per entity; avoid renumbering in production companies. |
2) Interim (Expected Cost) Accounts – Concept
Interim accounts capture the financial impact of inventory movements before invoicing. When you receive goods without a purchase invoice, or ship goods before a sales invoice, Business Central posts expected costs to interim G/L accounts, then reverses them automatically upon invoicing.- Enable in Inventory Setup: Expected Cost Posting to G/L (and typically Automatic Cost Posting).
- Accounts are defined in General Posting Setup (by Gen. Bus. Posting Group × Gen. Prod. Posting Group): Inventory (Interim), COGS (Interim), and Inventory Accrual (Interim).
- On invoicing, interim entries are reversed and replaced with actual Inventory / COGS / A/P / A/R postings.
3) Posting Flows – Purchases (Receive → Invoice)
Scenario: Receive items before vendor invoice.A) On Receipt (no invoice):- Inventory (Interim)………Dr.
To Inventory Accrual (Interim)- Item/Value Entries: Expected cost flagged on Value Entry.
B) On Invoice Posting:- System reverses interim:
- Cr Inventory (Interim); Dr Inventory Accrual (Interim).
- Posts actual: Dr Inventory; Cr Accounts Payable (Vendor) and Dr Purchase; Cr Direct cost applied
- Any cost differences adjust Inventory / Inventory Adjmt. / Purchase Variance per setup and costing method.
4) Posting Flows – Sales (Ship → Invoice)
Scenario: Ship items before sales invoice.A) On Shipment (no invoice): To Inventory (Interim).- Item/Value Entries: Expected cost flagged on Value Entry.
B) On Invoice Posting:- System reverses interim: Cr COGS (Interim); Dr Inventory (Interim).
- Posts actual: Dr COGS; Cr Inventory; plus Sales/A/R as applicable.
5) Where to Configure
Inventory Setup: Enable Expected Cost Posting to G/L and Automatic Cost Posting; set Automatic Cost Adjustment, Average Cost Calc. Type, Average Cost Period, Location Mandatory, Prevent Negative Inventory, and required No. Series.General Posting Setup: Map COGS Account, Inventory Accrual (Interim), Inventory (Interim), COGS (Interim), Purchase/Sales accounts by posting group combinations.Inventory Posting Setup: Map Inventory Posting Group × Location to Inventory G/L (and, if used, WIP for manufacturing).6) Month-End Checklist
- Post all open Purchase/Sales Invoices for receipts/shipments.
- Run Adjust Cost - Item Entries (ensure it completes without errors).
- If Automatic Cost Posting is off, run Post Invt. Cost to G/L.
- Reconcile interim G/L accounts (Inventory Accrual (Interim), Inventory (Interim), COGS (Interim)) — balances should be zero or explainable timing differences.
- Run Inventory to G/L Reconcile reports and tie to trial balance.
- Investigate aged Received Not Invoiced / Shipped Not Invoiced documents and chase missing invoices.
7) Reporting & Reconciliation Aids
- Inventory to G/L Reconcile / Inventory - G/L Reconciliation (identify mismatches between subledger and G/L).
- Stock/Inventory Valuation reports (option to include Expected Cost when needed).
- Aged Inventory / Item Ledger Entry analysis to find negative inventory or backdated postings.
8) Costing Method Notes
- FIFO/Specific: Cost is relieved based on actual layer; ensure timely Adjust Cost to reflect inbound purchase cost changes in COGS.
- Average: Average Cost Period and Calc. Type materially affect valuation—choose thoughtfully and avoid frequent changes in production companies.
- Standard: Variances (purchase/production) are expected; monitor variance accounts closely.
9) Common Pitfalls & How to Avoid Them
- Persistent interim balances: Usually un-invoiced receipts/shipments or missed cost adjustment posting — close documents and re-run batch jobs.
- Incorrect account postings: Check General Posting Setup (interim accounts) and Inventory Posting Setup (Inventory account) mappings.
- Negative inventory causing retroactive revaluations: Enable Prevent Negative Inventory or tighten posting dates and warehouse processes.
- Cross-currency timing differences: Expect variances at invoicing if receipts were posted with provisional exchange rates — reconcile to Purchase Variance / Inventory Adjmt. accounts.
10) Implementation Tips
- Test in a sandbox with representative historical data to observe cost adjustments and interim clearing.
- Lock No. Series before go-live and agree on backdating policies (Allow Posting From/To in G/L Setup).
- Schedule Adjust Cost - Item Entries (at least daily) and Post Invt. Cost to G/L (if Automatic Cost Posting is off).
- Educate users on Received Not Invoiced and Shipped Not Invoiced KPIs — these are timing, not errors, when interim is enabled.
