PRACTICAL GUIDE TO GENERAL LEDGER ALLOCATIONS IN DYNAMICS 365 FINANCE AND OPERATIONS
CONTENT Introduction How to fit into month-end process Use cases Allocation rule types Real Business Scenario Conclusion |
INTRODUCTION
In Dynamics 365 Finance and Operations (D365FO), allocation journals are used to systematically distribute general ledger (GL) account balances across multiple accounts, departments, or financial dimensions based on predefined rules. These rules can support both fixed and variable allocations, helping automate routine distribution processes.
This article explains the logic of the allocation process, its types, and provides an end-to-end demonstration through a real business scenario.
Let's get started.
HOW TO FIT INTO MONTH-END PROCESS
Allocation journals are used to distribute amounts from one financial dimension or account to others based on a defined logic (e.g., percentages, fixed amounts). They’re often created and posted during the month-end close for the following reasons:
- Accurate Departmental Reporting: You want each department or project to reflect its fair share of corporate costs.
- Consistent and Repeatable Process: Allocation journals can be automated using predefined rules and run at each month-end.
- Auditability: D365FO lets you post allocations as actual ledger journal entries, which helps with transparency and audit trails.
ALLOCATION RULE TYPES
1. Fixed Percentage
Distributes the source amount based on predefined percentages.
- Use case: You know the exact percentage split (e.g., 40% to Department A, 60% to Department B).
- Setup: You define a list of destination accounts/dimensions and assign a percentage to each.
Example:
You allocate $1,000 from the IT expense account:
- Dept A: 40% → $400
- Dept B: 60% → $600
2. Fixed Weight
Distributes the source amount based on weight factors, which are not percentages. D365FO calculates the distribution ratio based on the relative weights.
- Use case: You have proportional metrics (e.g., square footage, number of PCs) but not exact percentages.
- Setup: You assign weight values (like 2, 3, 5) to each destination, and D365FO does the math.
Example:
You allocate $1,000 based on weights:
- Dept A: 2
- Dept B: 3
- Dept C: 5
- Total weight = 10
- Allocated: A: $200, B: $300, C: $500
3. Equally
Splits the source amount evenly across all specified destinations.
- Use case: You want a simple equal split across all recipients.
- Setup: You list the destination dimensions, and D365FO splits the amount evenly.
Example:
You allocate $900 equally to three departments:
- Dept A: $300
- Dept B: $300
- Dept C: $300
4. Basis
Distribute the source amount based on the selected main account and/or financial dimension balances. If the account is a statistical account, the balance may reflect figures such as the total number of employees or the square footage of a facility.
- Use case: You want to distribute marketing expenses across departments based on their head counts.
- Setup: You define statistical accounts, and D365FO splits the amount based on the account balances (head counts).
Example:
You allocate $1,000 marketing expenses based on number of department employees:
- Dept A: 7 people → $233
- Dept B: 13 people → $433
- Dept C: 10 people → $333
USE CASES
Here are some common use cases:
1. Monthly Overhead Allocation
Use Case: Allocate indirect costs (e.g., utilities, rent, insurance or administrative salaries) to cost centers or departments.
Example: Rent of $50,000 is allocated to departments based on square footage.
2. Marketing or Sales Campaign Cost Allocation
Use Case: Allocate campaign expenses to various products, business lines, or regions.
Example: A $100,000 campaign is split among 5 product lines based on projected revenue contribution.
3. Intercompany Cost Allocations
Use Case: Allocate costs between different legal entities within the same organization.
Example: Corporate headquarters costs are allocated to subsidiaries.
4. Statistical Allocation Based on Ledger or Statistical Accounts
Use Case: Allocate costs based on statistical measures like machine hours, labor hours, or square footage.
Example: Maintenance costs are distributed based on machine usage hours tracked in statistical accounts.
5. Period-End Accruals and Adjustments
Use Case: Perform recurring allocations for accruals, amortizations, or revenue/cost deferrals.
Example: Amortizing an annual insurance cost monthly across the fiscal year.
6. Allocation of Payroll Costs
Use Case: Allocate salaries and wages to projects, departments, or cost centers.
Example: A project manager's salary is split 50/50 between two active projects.
7. Budget Allocations
Use Case: Distribute budgeted amounts across accounts or dimensions for planning and analysis.
Example: A marketing budget is allocated to various campaigns or geographies.
REAL BUSINESS SCENARIO
The company has $12,000 of IT expenses posted to a shared IT department. The goal is to reallocate this cost to three departments based on fixed percentages:
- Dept A – 20%
- Dept B – 30%
- Dept C – 50%
We’ll create a ledger allocation rule, and run it to generate a journal that moves the expense from the shared IT department to the other three.
Step 1: Create the Ledger Allocation Rule
Navigate to General ledger >> Allocations >> Ledger allocation rules.
Click +New.
Rule name: IT_ALLOC_FIXED.
Description: IT cost allocation by fixed percentage.
Switch to General tab.
Select the allocation method Fixed percentage.
Select the allocation journal name.
Click Source.
Select IT Expense Account.
Click +New.
Enter the Fixed percentage value as 20.
Select To account as 601410.
Select the first department.
Activate the allocation rule.
Step 2: Run the Allocation RuleNavigate to General ledger >> Allocations >> Process allocation request.
Select the rule.
Click OK.
Step 3: Review the Allocation Journal
Navigate to General ledger >> Allocations >> Allocation journals
Note that New button is not active since an allocation journal cannot be created manually. It has to be generated by the system based on the allocation rules.
Click Lines.
Review the journal lines. These entries mean:
You’re debiting Dept A/B/C for the new allocated amounts
You’re crediting the IT Dept to remove the cost
All is happening within account 601410 in our example.
Step 4: Post the Allocation Journal
Click Validate (to check for errors) and then click Post.
CONCLUSION
Allocation journals in Dynamics 365 Finance and Operations are essential for systematically distributing costs across financial dimensions based on predefined logic. They support a wide range of allocation methods, including fixed percentage, weight-based, equal, and basis-driven approaches, allowing organizations to align cost distribution with operational drivers. When integrated into the month-end process, these journals improve reporting accuracy, support auditability, and reduce manual adjustments. A well-defined allocation setup ensures consistency, simplifies recurring entries, and enhances the transparency of financial data across departments or legal entities.
