Physical Vs. Financial Inventory transactions in AX 2012

Many of the AX community  often wonder what could be the difference between Physical & Financial transactions and when does the differentiation occurs and/or what sense does it make to have physical inventory transactions in books. In this article below, I tried to show the differences between Physical & Financial Inventory and the necessity of having Physical inventory on the books.

Physical inventory transactions occur when the goods are actually picked up or moved from within the company. The goods may have moved out as part of sales commitment or lined up for production requirements, the goods have been received from the vendor at the warehouse.

Normally during the Physical Inventory transactions, we only create an accrued liability or accrued asset and the transaction is not complete fully. This is done to recognize a transaction of inventory movement is in the process.

For Example: Product Receipt of PO, Packing Slip for a Sales order or a Picking list for production.

Financial inventory transactions occur when a PO or SO is invoiced and a Production Order is completed, when a financial Inventory transaction occurs, the same physical transaction is updated by AX and is treated as one single transaction that is complete in all respects.

Previous accruals, if any (done at the time Physical inventory transaction) shall be reversed and the final revenue or expense/asset transaction is posted.

is the Physical Inventory required?

Many legal entities that implement AX have larger workplaces spread across multiple regions. a purchase or a sale transaction normally spreads across multiple period.

For Example: A purchase order that was initiated on 15th June, the goods receipt is taken place on 30th June and the invoice was received and posted on 4th July.

The books are normally closed on a monthly basis, in the above case the inventory has already been received in our premises, but if the physical inventory is not recorded the inventory counting exercise cannot be properly carried out. If the Physical inventory is recorded, the system shows accuracy of inventory on hand for the counting exercise to be smooth.

A thumb rule that always needs to be noted is that 

"A financial inventory transaction will have a physical inventory transaction posted,

 but 

a Physical inventory transaction may not have a financial inventory transaction posted"

Some broad examples of Physical & Financial inventory transactions are :

	Physical	Financial
Receipt (Stock Increase)	Ø Purchase order receipt  Ø Sales Returns (SO Returns) packing slip return  Ø Production order report as finished	Ø Vendor invoice  Ø Sales Returns (SO) invoice for a return  Ø Production order costing Ø Inventory Journals with positive stock
Issue (Stock Decrease)	Ø Sales order packing slip Ø Purchase returns (PO returns) product receipt return  Ø  Production order picking list	Ø Sales order invoice  Ø Vendor invoice return (Purchase returns invoiced) Ø Production order ended  Ø Inventory Journals with negative stock