Inventory Adjustment: A Lesser Known Feature of Business Central

The Inventory Adjustment feature in Microsoft Dynamics 365 Business Central is not new, flashy or sexy it just works. It's a nuts and bolts feature for any company that has inventory items and needs to understand what the best way is to adjust inventory. Currently in Business Central, there are two types of adjustments that can be made.

Quantity Adjustments

Inventory Adjustment: Adjusting the Quantity On-Hand

Let's assume Business Central thinks you have 100 items on-hand but when you went and physically counted you only have 95 on-hand items. What do you do? You need to do a negative adjustment of 5. The easiest way to do this is by going into the Item Journal Page, add today's date, tell the system you want to do a negative adjustment, pick your item number and quantity, and then select the post button.

If you're using Advanced Warehouse Management, you need to use what's called the Warehouse Item Journal. The steps to use the Warehouse Item Journal are almost identical as the steps used on the Item Journal Page. The difference is, you're reducing the quantities that are available in that bin which then requires a second step that has to be run in the Item Journal, where you pull in those adjustments to adjust the value and dollar amount of the inventory. This extra step within Advanced Warehouse Management is to make sure your warehousing personnel will not be directly impacting your financial statements.

What happens if you don't need a negative adjustment of 5 pieces but rather a positive adjustment of 5 pieces? You follow the same steps as with both previous scenarios but you do a positive adjustment instead of a negative adjustment. The one thing to keep in mind when doing a positive adjustment of inventory is that you're basically creating inventory out of thin air, as far as Business Central is concerned.

There's a Unit Cost field in the Item Journal and when you add the 5 positive pieces, the system will populate the Unit Cost with your current average cost for the item. The recommendation we give to customers with regards to the Unit Cost field is usually to hide this field, ignore it, or set it to where the user is not allowed to change it. Otherwise, the user can type anything they want into this field. For example, if they type 1,000,000 into the field you now have another $1,000,000 of inventory.

On the negative adjustments, Business Central will do a First In First Out (FIFO) application of the cost. This means the system will grab the oldest layer of inventory, apply this negative adjustment against this oldest layer of inventory, and reduce that. Unless you're lot tracked, in which case the system will reduce the quantity of that specific lot. So, if the user did type 1,000,000 into the unit cost field, the Adjust Cost process will override this and correct it based on your cost layers.

Revaluation Journal

Is a not well known feature within Business Central. Let's assume you've corrected your inventory to add 5 positive and you now have a quantity of 105 on-hand, but they're in the system as $1 per piece instead of the real price of $5 per piece. What do you do? You could possibly do a negative adjustment of 105 and then add a new 105 at the correct cost. However, this is not the recommended approach because you are now adjusting and creating additional Item Ledger entries, changing the FIFO layers, etc.

The Revaluation Journal page in Business Central gives you two options to make this change. The first way, allows you to tell the system to go grab all of your inventory that is currently on-hand for this item and that you want to revalue it. So, if you have 105 pieces, pull in that 105 valued at $1 and enter $5 into the field Revalued Cost and then post it. This doesn't create any Item Ledger entries but does create what's called a Value Entry underneath the existing Item Ledger entry to add $4 more to the value. This keeps your Item Ledger entries clean and now you have this history in the underlying Value Entries that shows it was originally $1, that you did a Revaluation Journal on this date to add $4, and then the system sums up the Value Entries to give you your total of $5.

Use of the Revaluation Journal is very common with organization's who are dealing with commodities because it's common for the value of commodities on-hand to change, and the Lower Cost of Market Rule from an accounting perspective informs us that we need to revalue that at the end of a reporting period.

Revaluation Journal Tip

Most of your inventory cost layers might be correct but if there's one cost layer that is incorrect you can go into your Revaluation Journal, enter your item number, and then use the Applies To button to pick an existing cost layer that you want to update. Business Central will then update just the cost of that layer. What if you've already sold the item(s) to the customer and shipped and invoiced it? You can still do this because once you post the adjustment the Adjust Cost process is going to run and see that you've sold the item(s) already and will adjust your cost to goods sold that is associated with that particular sales invoice.