💳 Accounts Payable & Accounts Receivable
in Dynamics 365 Finance
Vendors · Purchase Orders · 3-Way Matching · Customer Invoices · Credit & Collections · Revenue Recognition
Chapter Overview
5 learning objectives covering AP, AR, Credit & Revenue Recognition
1. Describe core accounts payable components (vendors, purchase orders, vendor invoices)
2. Describe vendor payments and settlements, including three-way matching
3. Describe core accounts receivable components (customers, customer invoices, free text invoices)
4. Describe credit and collection processes
5. Describe revenue recognition
🗺️ Chapter at a Glance — 6 Sections
- 5.2 — Core AP Components: Vendors, vendor invoices (4 entry methods), purchase orders, 3-way matching
- 5.3 — Vendor Payments & Settlements: Payment proposals (3 types), prepayments (2 methods), settlement with cash discounts
- 5.4 — Core AR Components: Customers, 3 invoice types (sales order, free text, pro forma), accounting distributions
- 5.5 — Credit & Collections: Credit management (credit limits, blocking rules), Collections management (customer pools, agents)
- 5.6 — Revenue Recognition: Revenue schedule, revenue journal, subscription billing (3 modules)
⚡ Key Contrast — AP vs AR
- Accounts Payable (AP) → Money owed TO vendors/suppliers → Listed as liability on balance sheet
- Accounts Receivable (AR) → Money owed BY customers → Listed as asset on balance sheet
- AP focuses on: purchase orders, vendor invoices, three-way matching, vendor payments
- AR focuses on: sales orders, customer invoices, credit management, collections
5.2 — Core Accounts Payable Components
Vendors, invoices, purchase orders & 3-way matching
📦 Vendors
A company purchases goods and services from vendors. Each AP transaction must be associated with a vendor. Use the Vendors page to create, maintain, and inquire about vendors.
- Enter as much data as possible when setting up a new vendor — used throughout the system for invoices, payments, and reports
- Base data automatically appears as the default for all transactions involving that vendor
- Default information can always be overridden when needed
📝 4 Methods to Enter Vendor Invoices Core AP
▼- Vendor Invoice Register — Quickly enters invoices that don’t reference a PO to accrue the expense. Use the invoice approval journal to select those invoices and post them to vendor balance (reverse the accrual). Together with the vendor invoice pool, can open associated POs later to post against the expense account.
- Vendor Invoice Journal — In a single step, quickly enters invoices that don’t reference a PO.
- Vendor Invoice Register + Vendor Invoice Pool — Quickly enters invoices to accrue the expense. Open associated POs later to post against the expense account.
- Open Vendor Invoices / Pending Vendor Invoices pages — Create vendor invoices from confirmed purchase orders.
📋 Purchase Orders — Key Facts Core AP
▼A purchase order is a document representing an agreement with a vendor to buy goods or services. It also helps track product receipts and accounting of vendor invoices.
- Header view — Information specified only once per PO (vendor details, etc.)
- Lines view — Modify individual order lines
- Charges aren’t directly on the PO page — accessed via menus on the order header and lines
Key Workspaces:
- Purchase Order Preparation workspace — Focused on PO creation, review, processing through approval, and confirmation with vendor
- Purchase Order Receipt & Follow-up workspace — Focused on processing receipt of goods/services; shows overdue or soon-due deliveries
- Vendor invoice entry → use Vendor Invoice Entry workspace
- Payments → use Vendor Payments workspace
Three-Way Matching
The most critical AP audit control
Two-Way Matching
Matches PO + Vendor Invoice. Verifies price matching only. Default policy set at legal entity level by the controller.
Three-Way Matching
Matches PO + Product Receipt (GRN) + Vendor Invoice. Also verifies quantity matching. Used for higher-risk item/vendor combinations.
🔍 Three-Way Matching — Price Matching Types
- Net Unit Price Matching — Net unit price on invoice line matches net unit price on PO line, within the tolerance percentage (e.g., +2%)
- Price Totals Matching — Net amount on invoice line matches net amount on PO line, within tolerance percentage, amount, or percentage and amount (e.g., +10%)
Fabrikam Example: Controller sets legal entity = 2-way match (10% price totals tolerance, 2% unit price tolerance). Bookkeeper in Malaysia sets specific PH2500-Computer + Contoso vendor = 3-way match. When the wireless mouse unit price exceeds 2% tolerance → warning icon appears.
⚠️ Invoice Matching Discrepancies
If approval is required for invoices with matching discrepancies: the “Approve posting with matching discrepancies” toggle on the Invoice matching details page must be selected before the invoice can be posted with price or quantity matching errors.
5.3 — Vendor Payments & Settlements
Payment proposals, prepayments & settlement with cash discounts
💳 Vendor Payment Methods
Manage vendor payments from: Accounts payable → Payments → Payment journal
- Payment Proposal — Most common; uses a query to quickly select vendor invoices based on criteria
- Manual One-off Payment — Manually entered for individual payments
- Prepayments — Advance payments before goods/services are fulfilled
3 Payment Proposal Types
Fabrikam example — date range: June 26 to July 10
| Invoice | Due Date | Discount Date | Option 1: Cash Discount | Option 2: Due Date | Option 3: Both |
|---|---|---|---|---|---|
| 1001 | July 15 | June 29 (expired) | Not Included | Not Included | Not Included |
| 1002 | July 20 | July 4 | Included | Not Included | Included |
| 1003 | June 29 | None | Not Included | Included | Included |
| 1004 | July 17 | July 1 | Included | Not Included | Included |
📝 Payment Proposal Logic
- Option 1 — Cash Discount: Includes invoices whose discount date falls within the date range. Invoice 1001 excluded — discount date expired. Invoice 1003 excluded — no discount date.
- Option 2 — Per Due Date: Includes invoices whose DUE DATE falls within the range. Only 1003 included (due June 29). Others — due date outside range.
- Option 3 — Due Date AND Cash Discount: Combines both options. 1003 (due date in range) + 1002 + 1004 (discount dates in range). Invoice 1001 excluded — both discount date expired AND due date outside range.
💸 Prepayments — 2 Methods Advance Payments
▼- Prepayment Invoicing — Defines prepayment on a purchase order. Must create a prepayment invoice associated with a PO. Minimizes risk; best for tracking which prepayments are for which POs.
- Prepayment Journal Vouchers — Create journal entries and mark them as prepayment journal vouchers. Cannot track which prepayments are against which POs. However, you can mark a posted prepayment for settlement against a PO.
🔄 Settlement & Cash Discount Example Fabrikam · Vendor 3064
▼Settlement = the process of applying payment to an invoice.
Scenario: Fabrikam buys goods from vendor 3064. Terms: 1% cash discount if paid in 14 days; invoices due in 30 days. Invoice for 1,000.00 on June 25. Cash discount of -10.00 available if paid by July 9.
- Partial payment July 1 (within discount period): Accountant settles -500.00 of the invoice. Cash discount taken = -5.05 (proportional). Total settled = 505.05.
- Remaining amount July 8 (still within discount period): Remaining = 495.00. Estimated cash discount = -5.00 (since 5.00 already taken). Posts payment journal. Invoice balance = 0.00.
5.4 — Core Accounts Receivable Components
Customers, 3 invoice types & accounting distributions
👥 Customers in AR
Accounts receivable = money owed to a business by its customers — listed as an asset on the balance sheet. When customers buy products/services:
- Create customer invoices based on sales orders or packing slips
- Enter free text invoices not related to sales orders
- Accept payments via: bills of exchange, cash, checks, credit cards, electronic payments
- Organizations with multiple legal entities can use centralized payments — record payments in a single legal entity on behalf of others
3 Types of Customer Invoices
Key exam point — know the difference between each type
📋 Customer Invoice for Sales Order
A bill related to a sale given to a customer. Created based on a sales order — includes order lines and item numbers. Item numbers are specified and posted in the ledger.
📄 Free Text Invoice
Not related to a sales order. Contains order lines with ledger accounts, free-text descriptions, and a sales amount. Cannot enter an item number. Must enter sales tax information manually. Customer balance posted to summary account from posting profile.
📝 Pro Forma Invoice
An estimate of the actual invoice amounts before the invoice is posted. Can be printed for a sales order invoice OR a free text invoice. Used for review/estimation before final posting.
📊 Accounting Distributions (Free Text Invoices)
Accounting distributions define how amounts are accounted for (revenue, tax, charges) on a free text invoice.
- Distribute amounts — View and change accounting distributions for an individual line and its child lines (taxes/charges). Can distribute a single line to multiple ledger accounts.
- View distributions — View accounting distributions for ALL lines. Cannot change from this view.
🔄 AR Business Process Flow
- Process customer prepayments
- Invoice customers
- Receive and enter customer payments
- Settle invoices and payments
- Manage and collect overdue customer invoices
Feeds into from: Manage projects (Project management & accounting) and Process sales orders (Sales and marketing)
5.5 — Credit & Collection Processes
Credit management + Collections management
💳 Credit Management — Key Capabilities
- Update credit attributes for customers (credit worthiness information)
- Create credit limits for customers via credit limit adjustments
- Create temporary credit limits — temporarily increase or decrease limits based on business requirements
- Add information about insurance and guarantees that affect the credit limit
- Create customer credit groups — link customers to share a single credit limit
- Assign risk scores to customers → automatically generate credit limits via credit limit adjustments
- Create blocking rules — put orders on hold based on risk, payment terms, credit limits, overdue amounts, or % of credit limit used
- Manage sales orders that are on hold, review reasons, and mitigate issues
- Release sales orders to continue through the posting process
- Set up a workflow to manage credit limit change approvals and sales order releases
📋 Collections Management — Key Concepts
The Collections page provides a centralized view for managing AR collections information.
- Customer aging snapshots — Contain aged balance information at a specific point in time
- Collections customer pools — Help organize collections work
- Collections agents can have their own customer pools
- List pages organize collections customers, activities, and cases
- All collections information for a customer is on one page — action can be taken from that page
- Interest and fees can be waived, reinstated, or reversed in one step
- Write-off transactions can be created in one step
- Nonsufficient funds (NSF) payments can be processed in one step
Collections agents begin the collections process either from predefined collection criteria customer lists OR from the Customers page.
5.6 — Revenue Recognition
Revenue schedules, revenue journal & subscription billing
📈 What is Revenue Recognition?
A financial process that involves the sale of a product, service, or subscription and breaks down the sales into multi-element lines. Revenue for different lines is recognized according to a defined schedule based on company-specific and industry-specific guidelines.
- The revenue price (defined on released products) can differ from the sale price
- Create a revenue schedule to determine the period for revenue deferral — can also be defined on sales order lines
- Revenue price is calculated when the sales order is confirmed OR when the invoice is posted
- To preview revenue price before invoice posting → must confirm the sales order
- Define the GL account for deferred revenue in the inventory posting profile
📒 Revenue Journal
- At the end of each period, create a revenue journal to release any scheduled lines due on or before a specified date
- Revenue journal is NOT posted immediately — verify correct amounts being released from deferred to actual revenue first
- Journal name created under: Revenue recognition → Setup → Journal names (with company-specific number sequence)
- Set up default journal name under: Revenue Recognition → Setup → General Ledger Parameters → Revenue recognition
Subscription Billing — 3 Modules
Enabled from Feature Management workspace
🔄 Recurring Contract Billing
Enables recurring billing and price management. Provides control over pricing and billing parameters, contract renewal, and consolidated invoicing.
📊 Revenue & Expense Deferrals
Eliminates manual processes and dependency on external systems. Manages revenue and enables real-time insight into monthly recurring revenue.
🧩 Multi-Element Revenue Allocation
Helps with revenue compliance by handling pricing and revenue allocation across multiple items.
⚠️ Critical Rule — Subscription Billing vs Revenue Recognition
Subscription billing and revenue recognition features CANNOT be used simultaneously. You must disable revenue recognition before enabling subscription billing.
Flashcards — Revise Key Terms
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MCQ Quiz — All 15 Textbook Questions
Based directly on textbook MCQs with verified answers
Chapter Summary
All key concepts at a glance
| Topic | Key Points |
|---|---|
| AP vs AR | AP = money owed TO vendors = Liability; AR = money owed BY customers = Asset |
| Vendors | Use Vendors page; enter maximum data as it defaults to all transactions; data can be overridden |
| Vendor Invoice Entry (4 methods) | 1) Vendor Invoice Register, 2) Vendor Invoice Journal, 3) Register + Invoice Pool, 4) Open/Pending Vendor Invoices (from confirmed POs) |
| Purchase Order Views | Header view (PO-level info) + Lines view (modify order lines); charges accessed via menus |
| PO Workspaces | PO Preparation (creation/approval/confirmation) + PO Receipt & Follow-up (goods receipt tracking) |
| 2-Way Matching | PO + Vendor Invoice; price matching only; set at legal entity level by controller |
| 3-Way Matching | PO + Product Receipt (GRN) + Vendor Invoice; also quantity matching; for higher-risk combos |
| Price Matching Types | Net Unit Price Matching (unit-level tolerance, e.g., ±2%) + Price Totals Matching (total amount tolerance, e.g., ±10%) |
| Payment Proposals (3 types) | 1) Cash Discount (by discount date), 2) Per Due Date (by due date), 3) Due Date + Cash Discount (both combined) |
| Prepayments (2 methods) | Prepayment Invoicing (linked to PO; minimizes risk) + Prepayment Journal Vouchers (no PO link; simpler) |
| Settlement | Applying payment to an invoice; supports partial payments with proportional cash discounts |
| 3 Customer Invoice Types | 1) Sales Order Invoice (item numbers; linked to SO), 2) Free Text Invoice (no item number; ledger accounts; manual tax), 3) Pro Forma Invoice (estimate before posting) |
| Free Text Invoice | Not related to SO; cannot enter item number; must manually enter sales tax; distribute amounts to multiple ledger accounts |
| Accounting Distributions | Define how amounts (revenue, tax, charges) are accounted for on free text invoices; Distribute amounts = can change; View distributions = cannot change |
| Credit Management | Credit limits, temporary limits, customer credit groups, risk scores, blocking rules, sales order holds, workflow |
| Collections Management | Centralized Collections page; customer aging snapshots; customer pools; write-offs, NSF payments, interest waiver — all in one step |
| Revenue Recognition | Breaks sales into multi-element lines; revenue price set on released products; revenue schedule on SO lines; revenue journal releases deferred revenue |
| Revenue Journal Path | Revenue recognition → Setup → Journal names; default: Revenue Recognition → Setup → GL Parameters → Revenue recognition |
| Subscription Billing (3 modules) | Recurring Contract Billing + Revenue & Expense Deferrals + Multi-Element Revenue Allocation |
| Critical Rule | Subscription Billing and Revenue Recognition CANNOT be used simultaneously — disable revenue recognition before enabling subscription billing |
🎯 Exam-Critical Facts
- AP = Liability on balance sheet; AR = Asset on balance sheet
- Vendor invoices can be entered both manually AND electronically through a data entity
- 3-Way Match = PO + Product Receipt (GRN) + Vendor Invoice
- 2-Way Match = PO + Vendor Invoice (price matching only)
- Net Unit Price tolerance example = ±2%; Price Totals tolerance = ±10%
- Payment Proposal types: Cash Discount, Per Due Date, Due Date and Cash Discount
- Settlement = applying payment to an invoice
- Pro forma invoice = estimate of actual invoice amounts before posting
- Free text invoice = NOT related to sales order; cannot enter item number
- Free text invoice: distribute one line to multiple ledger accounts via “Distribute amounts”
- NSF payments, write-offs, interest waiver — all processed in one step in Collections
- Revenue price calculated when SO is confirmed OR when invoice is posted
- Revenue journal is NOT posted immediately — verify first, then post
- Revenue journal name path: Revenue recognition → Setup → Journal names
- Subscription Billing and Revenue Recognition = CANNOT be used simultaneously
- Subscription Billing enabled from: Feature Management workspace