Physical and financial updates

This topic provides an overview of which types of transactions increase or decrease inventory quantities.

Inventory transactions can be physically updated and financially updated in Microsoft Dynamics 365 for Finance and Operations. Some types of physical and financial transactions increase inventory quantities, whereas others decrease the quantity.

Physical increases

When a physical transaction is posted, the status of the transaction record is Received. The following transactions are considered physical increases:

  • Purchase order receipt
  • Sales order packing slip return
  • Reporting a production order as finished
  • By-product on a production order picking list

Financial increases

When a financial receipt transaction is posted, the status of the transaction record that increases the quantity is Purchased. The following transactions are considered financial increases:

  • Vendor invoice
  • Sales order invoice for a return
  • Production order costing
  • Positive quantity inventory journals, such as movement, profit and loss, counting, bill of materials, and transfer

Transactions that increase quantity

Transactions that increase quantity are posted at the running average cost price. Finance and Operations calculates a running average cost price that is based on the cost of each of these transactions for each inventory dimension that is being tracked financially. For information about running average cost prices, see Running average cost price.

Transactions that decrease quantity

Finance and Operations uses the calculated running average cost price when a transaction that decreases quantity is posted, regardless of the inventory model that is associated with that inventory. The transaction that decreases quantity must not have been marked to another transaction before it was posted. If the physical on-hand inventory becomes negative, Finance and Operations uses the inventory cost that is defined for the item on the Item page. Note: If multisite functionality is enabled, this cost will instead be the inventory cost that is defined for a site on the Default order settings page.

Physical issues vs. financial issues

When a physical issue transaction is posted, the status of the transaction record is Deducted. The following transactions are considered physical issues:

  • Production order picking list journal
  • Sales order packing slip
  • Purchase order packing slip return

When a financial transaction is posted, the status of the transaction record is Sold. The following transactions are considered financial issues:

  • Ending a production order
  • Sales order invoice
  • Vendor invoice return
  • Negative quantity inventory journals, such as movement, profit and loss, counting, bill of materials, and transfer

Transactions that decrease quantity are posted at the running average cost price. Therefore, the inventory close procedure is required in order to settle issue transactions to receipt transactions, based on the inventory model that is assigned to each item.