Worker vs Vendor in Expense Management – Dynamics 365 Finance and Operations (D365FO)

WORKER VS VENDOR IN EXPENSE MANAGEMENT – DYNAMICS 365 FINANCE AND OPERATIONS (D365FO)

CONTENT Introduction Worker-Based Reimbursement Vendor-Based Reimbursement Process Flow Comparison Expense Management Parameters Multi-Legal Entity Considerations Common Scenarios Reporting and Auditing Considerations Conclusion

Introduction

Expense Management in Dynamics 365 Finance and Operations (D365FO) enables organizations to track, process, and reimburse business-related expenses. Depending on who incurs the expense and how reimbursement is expected to occur, you may configure the system to reimburse either a worker (employee) or a vendor (third party). This article outlines the key differences between these two approaches and the practical implications for finance and compliance teams. This article intends to be an introductory knowledge based resource that provides a solution to initial expense management design discussions. 

Worker-Based Reimbursement

When to Use

• This method is applicable when an employee has a business-related expense and submits an expense report for reimbursement. Common examples include travel, meals, lodging, or mileage expenses.

Configuration Requirements

• The individual must exist as a worker in the Human Resources module and be associated with a legal entity.

• A vendor account must be linked to the worker. This can be created automatically (if system parameters are configured accordingly) or linked manually via the Employee > Expense tab > Employee mapping and per diem rates.

• Expense Management parameters must be set to reimburse through Accounts Payable using the linked vendor account.

Accounting Impact

• When the expense report is posted, the expense is debited to the designated expense account (e.g., travel expense).
• A liability is posted to the worker’s vendor account, which becomes eligible for payment through the standard AP payment process.

Note

• The vendor account must have valid bank account details if electronic payments are used.
• The system uses standard payment methods (such as checks or AC or WIRE) to pay the worker, just as it would for a regular vendor.

Vendor-Based Reimbursement

When to Use

This method is used when when the expense is incurred by a third-party vendor or when a company directly pays an external party for goods or services, such as hotel bookings made by a travel agency or outsourced consulting services.

Configuration Requirements

• The external party must be created as a vendor record in the Accounts Payable module.
• Expense categories can be configured to allow vendor selection when appropriate.
• No linkage to a worker record is required.

Accounting Impact

• The system posts the expense to the designated expense account.
• The liability is posted directly to the vendor, and payment is processed through standard AP procedures.

Note

• This configuration avoids involving employees in expense-related payments when the service or product is procured directly by the organization.
• Ideal for scenarios where centralized procurement or travel teams handle bookings.

Process Flow Comparison

Worker Reimbursement Flow:

1. Worker creates an expense report via self-service or mobile app.

2. Report follows the approval hierarchy.

3. After final approval, a vendor transaction is created against the worker’s vendor account.

4. Payment is processed through Accounts Payable, based on standard payment proposal functionality.

Vendor Payment Flow:

1. An expense or invoice from a vendor is entered (e.g., from a travel agency or external consultant).

2. The document is reviewed and approved as required.

3. A vendor liability is created.

4. The payment is processed like any other vendor invoice..

Expense Management Parameters

Expense Management behavior can be configured in:

Expense Management > Setup > Expense Management parameters

Under the Reimbursement tab, there are key settings:

• Reimburse through Accounts Payable: When selected, the system expects a vendor account to be associated with each worker.
• Create vendor account automatically: If enabled, D365FO creates a vendor record for each worker, reducing manual setup.

⚠️ It’s recommended to review your number sequences and vendor groups before enabling automatic creation, as these will determine the structure and grouping of generated vendor accounts.

Multi-Legal Entity Considerations

In organizations operating across multiple legal entities, a single worker may be associated with more than one legal entity. In such cases:

• A vendor account must be created for each legal entity where the worker is submitting expenses.
• The system does not share vendor records across entities by default, as financial transactions and payments are managed independently per legal entity.

Failure to configure the appropriate vendor account for each entity may result in failed postings or blocked payments.

Common Scenarios

The table below outlines typical business cases and whether a worker-based or vendor-based configuration is appropriate. This helps clarify when each method should be used, based on who incurs the expense and how reimbursement or payment is expected to occur. Using the correct setup avoids confusion in AP processing and supports clean financial postings.

Reporting and Auditing Considerations

Accurate configuration of worker and vendor expense flows is critical for:

• Maintaining audit trails: Clear identification of payee (worker vs. vendor) ensures traceability.
• Simplifying month-end processes: Vendor liabilities are easier to reconcile when correctly segmented.
• Internal control compliance: Separating employee reimbursements from vendor payments supports proper delegation of authority (DOA) enforcement and SOX compliance.
• Financial dimension tracking: Both configurations allow for financial dimensions to be captured per line item (e.g., department, cost center), enabling accurate reporting.

Conclusion

D365FO offers flexible options to support different expense reimbursement scenarios through either worker-linked vendor accounts or standard vendor records. Selecting the appropriate configuration depends on who incurred the expense, how the payment will be processed, and the internal policies around employee reimbursements and vendor procurement.

Use worker-based configuration when employees pay out-of-pocket and expect to be reimbursed. Use vendor-based configuration when the organization pays third-party service providers directly. Properly configuring these options will result in clean accounting entries, better workflow control, and alignment with internal compliance frameworks.