Finance Fundamentals in Business Central: A Functional Overview for Accounting Operations

Whether you're a seasoned finance professional or just getting started with ERP systems, understanding how core accounting elements translate into system transactions is essential. Microsoft Dynamics 365 Business Central offers a robust framework for managing financial operations - from purchases and sales to accruals, deferrals, and journal postings.

This blog post breaks down the key accounting concepts and shows how they map to Business Central functionality, with clear examples and G/L impacts.

 

The Five Accounting Elements

Element	Nature	Debit Effect	Credit Effect	Examples
Asset	What you own	Increases	Decreases	Inventory, Bank, Accounts Receivable
Liability	What you owe	Decreases	Increases	Accounts Payable, VAT Payable
Equity	Owner’s interest	Decreases	Increases	Retained Earnings, Capital
Revenue	Income earned	Decreases	Increases	Sales Revenue
Expense	Cost incurred	Increases	Decreases	COGS, Purchases, Salaries

 

Purchase Transaction Flow

Let’s say you purchase goods worth ₹10,000 with 18% VAT.

Step 1: Purchase Invoice Posting

Account	Type	Debit/Credit	Amount	Impact
Inventory/Expense	Asset/Expense	Debit	₹10,000	Asset increases or expense incurred
VAT Receivable	Asset	Debit	₹1,800	Input VAT to reclaim
Accounts Payable	Liability	Credit	₹11,800	Liability to vendor increases

Financial Statement Impact:

• Balance Sheet: Inventory ↑, VAT ↑, Payables ↑
• Income Statement: No impact yet

Step 2: Payment Journal

Account	Type	Debit/Credit	Amount	Impact
Accounts Payable	Liability	Debit	₹11,800	Liability cleared
Bank Account	Asset	Credit	₹11,800	Cash outflow

When Expense Hits Income Statement

Only when inventory is sold or consumed:

Account	Type	Debit/Credit	Amount	Impact
COGS	Expense	Debit	₹10,000	Expense recognized
Inventory	Asset	Credit	₹10,000	Inventory reduced

 

Sales Transaction Flow

Selling goods worth ₹10,000 with 18% VAT.

Step 1: Sales Invoice Posting

Account	Type	Debit/Credit	Amount	Impact
Accounts Receivable	Asset	Debit	₹11,800	Customer owes you
Sales Revenue	Revenue	Credit	₹10,000	Income earned
VAT Payable	Liability	Credit	₹1,800	Tax liability increases
COGS	Expense	Debit	₹7,000	Expense incurred
Inventory	Asset	Credit	₹7,000	Inventory reduced

Step 2: Cash Receipt Journal

Account	Type	Debit/Credit	Amount	Impact
Bank Account	Asset	Debit	₹11,800	Cash received
Accounts Receivable	Asset	Credit	₹11,800	Customer balance cleared

 

Accruals vs Deferrals

Accruals

Recognize revenue or expense before cash or invoice is received/paid.

Account	Type	Debit/Credit	Financial Statement
Accrued Revenue	Asset	Debit	Balance Sheet
Revenue	Revenue	Credit	Income Statement
Accrued Expense	Liability	Credit	Balance Sheet
Expense	Expense	Debit	Income Statement

Deferrals

Delay recognition of revenue or expense to future periods, even if cash/invoice is received/paid.

Account	Type	Debit/Credit	Financial Statement
Deferred Revenue	Liability	Credit	Balance Sheet
Deferred Expense	Asset	Debit	Balance Sheet
Revenue	Revenue	Credit	Income Statement
Expense	Expense	Debit	Income Statement

Business Central supports deferrals using:

• Deferral Templates
• Deferral Codes on G/L accounts

Accounts Receivable vs Accrued Revenue

Concept	Definition	When Used
Accrued Revenue	Revenue earned but not invoiced	Service delivered, invoice pending
Accounts Receivable	Amount invoiced and owed by customer	Invoice posted

Example:

• March 30: Service delivered → Accrued Revenue
• April 5: Invoice posted → AR replaces Accrued Revenue
• April 20: Payment received → AR cleared, Bank ↑

 

Summary by Accounting Element

Element	Examples from Business Central Transactions
Asset	Bank, Inventory, AR, VAT Receivable, Deferred Expense, Accrued Revenue
Liability	AP, VAT Payable, Deferred Revenue, Accrued Expense
Revenue	Sales Revenue, Accrued Revenue
Expense	COGS, Purchases, Accrued Expense, Deferred Expense
Equity	Indirectly affected via Net Income

 

Final Thoughts

Understanding how each transaction flows through the financial statements - and how Business Central handles them - is key to maintaining accurate books and making informed decisions. Whether you're posting invoices, managing accruals, or configuring deferrals, Business Central provides the tools to align your operations with accounting best practices.