Inventory Adjustment Account in Business Central: Causes, Fixes, and Best Practices Part 6

Part 6 of the Inventory Costing Series

If your Inventory Adjustment account in Business Central balance keeps increasing month after month, you’re not imagining things—and it’s not just how Business Central works. A growing balance in this account is your system’s way of signaling that something is off with your inventory costing processes.

In this article—the sixth in our inventory costing series—we’re focusing solely on the Inventory Adjustment account: what it’s used for, why it gets bloated, how to investigate it, and what you can do to keep it under control.

---

What Is the Inventory Adjustment Account Supposed to Do?

The Inventory Adjustment account in Business Central serves two primary roles—and understanding both is key to managing it properly.

First, it’s a permanent home for legitimate cost changes that result from:

• Physical inventory adjustments (e.g., cycle counts, write-offs, unexpected gains or losses)
• Scrap or loss recorded through negative adjustments
• Manual inventory reclassifications that change item value

Second, it may act as a temporary holding account for certain cost corrections:

• Adjustments made by the Adjust Cost – Item Entries process
• Value corrections when costs are finalized after receipt
• Rounding differences or timing delays in posting cost entries

When everything is configured and maintained correctly, only real, intentional adjustments should remain in this account long term. All others should post through to Inventory or COGS as part of the regular costing cycle.

---

Why the Inventory Adjustment Account in Business Central Gets Too Large

A ballooining balance is typically a symption of deeper problems. Here are the most common cultprits:

1. Adjust Cost – Item Entries Not Posted to G/L

Running Adjust Cost – Item Entries updates internal costs, but unless “Post to G/L” is enabled in Inventory Setup, the G/L never sees those changes.

2. Improper Posting Setup

Business Central won’t let you post transactions if required G/L accounts are missing—it will throw an error. But if you map the wrong account, the system will quietly follow those instructions—even if they don’t make sense.

A common mistake is confusing the Inventory Adjustment account in Business Central with Direct Cost Applied or COGS. For example, some users mistakenly assign the Inventory Adjustment account where Direct Cost Applied should go in the Inventory Posting Setup. This misconfiguration causes regular inventory or cost corrections to be posted into the Inventory Adjustment account—even though they don’t belong there.

The system isn’t guessing. It’s doing exactly what it’s told—so your posting setup needs to be spot-on.

To avoid this:

• Double-check your posting group combinations
• Ensure Direct Cost Applied, COGS, and Inventory Adjustment accounts are clearly differentiated
• Review your chart of accounts regularly for signs of misrouted entries

Even a single misalignment can result in dozens (or thousands) of adjustments piling into the wrong place.

3. Revaluation Journals Missing Applies-to Entry

When users revalue inventory without applying the change to a specific entry, the system doesn’t know what transaction to adjust—so it throws the difference into Inventory Adjustment.

4. Mismatched or Missing Purchase Invoices

Items received but not invoiced are temporarily posted at expected cost using interim accounts. If the invoice never arrives—or isn’t properly matched—the expected cost remains in limbo. While these entries don’t directly hit the Inventory Adjustment account, cost corrections triggered later (by Adjust Cost – Item Entries) may be misrouted there if posting setup is incorrect or G/L posting is disabled. The result? More noise in the Inventory Adjustment account.

5. Manual G/L Workarounds

Posting directly to the Inventory Adjustment account to “fix” balances creates noise without fixing the root cause.

Why It Matters

An overgrown Inventory Adjustment account in Business Central doesn’t just clutter your chart of accounts—it affects your bottom line.

• It distorts margins by hiding cost variances that should go to COGS
• It throws off inventory valuation, making month-end and year-end reporting painful
• It raises red flags for auditors, who will want a detailed explanation
• It signals deeper breakdowns in your cost flow setup or processes

Bottom line? If this account is growing, you’re losing control over your inventory accuracy.

---

How to Investigate the Inventory Adjustment Account

✅ Step 1: Run the Value Entries Report

Go to Inventory > Reports > Inventory - Value Entries. Filter by:

• Source Code = ‘AdjCost’
• G/L Account = Inventory Adjustment

Review volume and value of adjustments hitting this account. Look for spikes.

✅ Step 2: Review Posting Setup

Check Inventory Posting Setup and General Posting Setup to ensure correct accounts are mapped for:

• Inventory
• COGS
• Direct cost applied

✅ Step 3: Check Inventory Setup

Go to Inventory Setup and verify these two checkboxes:

• Automatic Cost Posting
• Post to G/L

If they’re off, cost adjustments are calculated but never hit the general ledger.

✅ Step 4: Review Revaluation Journals

Look for missing “Applies-to Entry” links in revaluation journals. Mass revaluations without targeting specific entries are a major cause of bloated balances.

✅ Step 5: Match Invoices to Receipts

Use 3-way matching or item charges to ensure receipts aren’t stuck at expected cost.

---

How to Prevent This Going Forward

• Run Adjust Cost regularly (nightly or weekly)
• Always post to G/L when running Adjust Cost
• Limit revaluation journals to specific entries, not blanket batches
• Lock item card setups after approval—don’t let users change costing methods
• Reconcile Inventory to G/L every month and flag mismatches
• Train staff to avoid shortcuts like manual cost corrections

---

A Real-World Cautionary Tale

One client noticed their Inventory Adjustment account had grown by over $200K in just four months. They had:

• Turned off “Post to G/L” by mistake
• Revalued dozens of items without applies-to links
• Never cleared out expected costs from old receipts

It took weeks of cleanup—rerunning Adjust Cost, reclassifying G/L entries, and documenting everything for the audit. Lesson learned: the Inventory Adjustment account isn’t just a technical detail—it’s a vital health indicator.

---

Final Thoughts

Your Inventory Adjustment account shouldn’t be a dumping ground. It should be a short-term holding area that clears out once costs are finalized. Only true inventory adjustments should remain.

If the balance keeps growing, it’s a sign that your costing processes or setup need attention. Address it now—and save yourself from far bigger headaches down the road.

Next up: Part 6 – How to Use the Revaluation Journal in Business Central (Without Causing Chaos in Your G/L)

If you find this valuable, please don’t forget to subscribe to stay up to date.

Don’t forget the first 4 posts in our Inventory Costing Series:

How Business Central Costing Actuall Works (And why it’s the first thing you should understand – Part 1

Mastering Business Central Inventory Posting Setup Process – Part 2

Inventory Costing Methods in Business Central: FIFO, Average, Standard and More – Part 3

Manufacturing Costing in Business Central: Understanding Standard Costs and Variance Reporting – Part 4

We’ve just started a series on the Power of Dimensions so make sure to check that out.