The 4 Key Inventory Adjustment Options in Dynamics 365 Finance & Operations

Inventory adjustments in Dynamics 365 Finance & Operations are a common challenge for warehouse managers, controllers, and accountants.

There are many kinds of inventory journals in Finance & Operations, and it’s easy to get confused about which option should be used for each scenario. Mistakes can lead to inaccurate inventory counts and confusing entries in profit & loss statements.

As a former warehouse and materials manager in multiple industries and now a solution specialist in Dynamics 365 Finance & Operations, I’ve seen a lot of these scenarios. In this article, I’ll explain and give best practices for 4 of the most common inventory journals.

Table of Contents

• What Are the Inventory Adjustment Options?
• Counting Journal
• Adjustment Journal
  • Counting Journal vs Adjustment Journal
• Movement Journal
  • Inventory Adjustment vs Movement Journal
• BOM Journal

Note: Even though most customers, commentators, and consultants still call it Dynamics 365 Finance & Operations or D365FO, Microsoft now technically licenses it as Dynamics 365 Finance and Supply Chain Management.

What Are the Inventory Adjustment Options (And Why Do They Matter?)

The inventory adjustment options in Finance & Operations are used to properly log the “why” for changing inventory quantity or value in the warehouse.

The four options are:

• Counting Journal: Use this when an unexpected inventory variance is discovered during regular cycle counting.
• Adjustment Journal: For adjusting inventory due to an unexpected inventory variance at an unexpected point in the operation.
• Movement Journal: For when you need to add or subtract inventory and specify the adjustment to a specific general ledger offset account.
• BOM Journal: This option is best when you need to quickly adjust inventory that consumes items to create a different item.

Teaching the full warehouse team how and when to use these 4 options makes sure that the accounting team gets the information they need.

Without some careful training and processes, the warehouse team will likely choose just the inventory adjustment and counting journals for everything, both of which almost always affect your profit & loss.

Excessive, unexpected profit & loss adjustments will make your accounting and financial leadership teams concerned that your warehouse doesn’t have control of your inventory.

Movement and BOM journals allow for more nuance in the tracking of inventory financials. Movement journals allow you to choose which offset account they go to, which is helpful to indicate if an inventory change was planned. BOM Journals allow you to track the cost of items by understanding the cost of materials consumed to create other items.

Why Inventory Quantity Changes Often Have Problems

While the above four options may sound simple in principle, the different inventory quantity change options in Finance & Options often need extra training and support because:

• The inventory adjustment options are used in one department (operations/warehouse) but have important implications for a different department (finance/accounting).
• The names of the options aren’t intuitive.
• Only the counting journal type is available on warehouse workers’ mobile devices by default. (The base Microsoft mobile F&O application for warehouse only has the counting process.)

Counting Journal

The counting journal should be used for cycle counting that finds an unexpected variance during a regular cycle count or an ad hoc count.

For example, once per month, I perform an inventory audit of a certain item. During the count, I report that there are 15 units on the shelf.  However, the shelf was only expected to contain 10 units. Rather than posting an Inventory Adjustment to add the additional 5 units, a Counting Journal allows me to specify that I counted 15 on the shelf and that is why this adjustment occurred.

The counting journal always posts to a pre-configured offset account, which usually affects your general ledger, and it does not allow the user to change that offset account.

Typically, only direct warehouse workers will initiate a counting journal. The other 3 options are often done by management, quality assurance, & administrative workers.

Be aware that out of the box, the Microsoft Warehouse Management mobile app used by many Dynamics 365 Finance & Operations warehouse workers only includes the counting journal type. So in practice, many warehouse workers will use it even if not doing a cycle count.

You can enter the counting journal in Finance & Operations by going to Inventory Management > Journal Entries> Item Counting > Counting.

Counting Journal Reason Codes

A major benefit to using counting journals is that this journal type allows for the setup and use of reason codes. Reason codes allow users to select a code from a list to differentiate counts performed in the warehouse.

For example, one reason code could be used to track damaged inventory while another reason code could be used to track lost inventory.

Adjustment Journal

The adjustment journal should be used when you find you have too many or too few of an item, and you aren’t doing a planned count of your inventory. In formal terms, this is when you encounter an unexpected variance outside of a planned count.

For example, if I’m a user and I’m picking an order, and it tells me to go pick 7 of a certain item from the shelf, when I walk up to the shelf there may be only 6 there. This is not part of a planned count, but I need to fix the inventory, so I may do an inventory adjustment to subtract one unit.

The adjustment journal affects profit & loss statements in most Finance & Operations deployments. It always posts to a pre-configured offset account and does not allow the user to change the offset account.

You can enter the adjustment journal in Finance & Operations by going to Inventory Management > Journal Entries > Items > Inventory adjustment.

Counting Journal vs Adjustment Journal

In a counting journal, the user tells the system how many items are there, and the system makes the adjustment based on the variance from the expected quantity. (The counting journal type is designed on the assumption that the user doesn’t know how much inventory should be in the location.)

In an adjustment journal, the user simply tells the system how much to adjust (to add or remove) from that inventory location.

Movement Journal

The movement journal behaves very similarly to an adjustment journal. The major difference is that users can specify the offset account that the adjustment will post to.

A movement journal is the right choice when inventory needs to be adjusted for a specific, pre-determined business reason.

For instance, a coffee manufacturer stocks the employee breakroom with their product. Every week, an employee grabs a case of coffee off the warehouse shelf and moves it to the breakroom. That should hit the employee breakroom account, not the inventory adjustment offset account.

You can enter the movement journal in Finance & Operations by going to Inventory Management > Journal Entries > Items > Movement.

Inventory Movement vs Inventory Adjustment

Both the movement journal and the adjustment journal tell the Finance & Operations system how much of the inventory to add or subtract.

The main difference is that the inventory adjustment journal posts to a pre-determined offset account (usually affecting profit and loss statements), whereas the inventory movement journal allows the user to select the offset account when posting the journal.

What Does a Movement Journal “Move”?

An important thing to understand about the “movement” journal is that it’s not about relocating physical inventory from one place to the next; it’s about “moving” the quantity up and down.

For relocating inventory, use a transfer order or transfer journal.

I remember this was something I had to learn when I was a warehouse manager. When somebody needed inventory outside of a regular sales or manufacturing process, I would create inventory adjustments for the change. My finance team came and asked “Why are you making all these adjustments? They are planned, they should be movements.”

I was confused because I wasn’t “moving” the inventory to a new place. It took some effort to understand that the “movement” in Finance & Operations means an adjustment to a specific offset account for a specific business reason.

BOM Journal

The BOM journal is good for things like substitutions. It enables you to add items by consuming other items. This can help track the accurate cost of inventory.

For instance, imagine our business sells makeup wipes. We have a 10-count pack that we include in our makeup kits and a 12-count pack that we sell individually. Due to a delayed purchase order, we have run out of the 10-count pack. Rather than halting sales on the make-up kits, we decide to use the 12-count packs in our kits.

Using a BOM journal, we can systematically convert the 12-count packs into 10-count packs and continue to meet customer demands while tracking the variable cost of the item.

You can enter the BOM journal in Finance & Operations by going to Inventory Management > Journal Entries > Items > Bills of Materials.

Setting Up Your Warehouse for Success

Improving efficiency in your warehouse operations requires aligning your people, processes, and technology.

With respect to inventory quantity changes, a common problem is that it can be inconvenient for warehouse workers to enter Adjustment, Movement, or BOM Journals, as these options are not available on the Warehouse Management Mobile Device by default. Movements may be even more challenging for a warehouse worker due to a lack of awareness of the General Ledger offset account.

So, without dedicated processes and training, warehouse workers may instead simply enter these changes as counting journals using the mobile device or as adjustment journals because they are the most straightforward. This can create a high number of unexpected adjustments without a clear understanding as to why the inventory was adjusted. Utilizing the different journal types effectively creates a clear and holistic view of inventory control for both finance and warehouse teams.

Due to the fast-paced nature of inventory management and warehousing, if you have many movements or BOM entries, you may want to consider putting a desktop workstation in a strategic location in your warehouse. For instance, I once worked in a company where we had an employee workstation called the “gatekeeper,” which was positioned at a physical gate between the warehouse and the production floor. One of the gatekeeper’s duties was to accurately process different adjustment types to ensure inventory was tracked accurately both physically and fiscally.

Discover the Different Inventory Adjustment Options in D365 F&O

For a complete walkthrough on the different inventory adjustment options in Dynamics 365 Finance & Operations, check out my recorded webinar:

If you’re looking for training, support, and guidance tailored to your specific situation, learn more about our Finance & Operations support services. As a Dynamics 365 Finance & Operations Partner, Encore is here to help you get the most from your Dynamics 365 solutions.