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Distinguishing among concepts in Microsoft Dynamics AX 2012: commitment, agreement, and contract

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In this blog entry we take a closer look at how we apply the concepts named commitment, agreement, and contract in Microsoft Dynamics AX.

These concepts have two aspects: a social aspect and a documentation aspect. In the following conceptual object model, I offer a visualization of these two aspects and of the relationships among these concepts.

Commitment

We apply the term commitment to represent a promise or obligation to perform an activity in the future.

For example, a purchase request documents a requesting organization’s commitment to pay for the product procured for a requisitioner.

This concept is defined in the REA (resource, event, agent)accounting model where it is used to model the formation and execution of commitments between economic units.

Agreement

We apply the term agreement to represent a commitment between two or more parties based on a mutual understanding about their respective rights and obligation.

For example, a purchase agreement documents an agreement between two or more parties based on an understanding that a buying party will commit to purchasing a specific quantity or volume of product over a period of time in exchange for favorable prices and discounts.

Microsoft Dynamics AX 4.0 sales blanket orders and purchase blanket orders have been refactored and reintroduced as sales agreements and purchase agreements in Microsoft Dynamics AX 2012. While the term blanket order is common in the manufacturing industry sector, it is not common in governmental industry sector. Partners can customize Microsoft Dynamics AX so that the terms sales blanket order and purchase blanket order can be used for manufacturing vertical implementations.

Contract

We apply the term contract to represent a legally binding agreement between two or more parties.

For example, a project contract documents the terms, conditions, and status of a legally binding agreement between a buying party and a selling party.

The concept named contract is realized in three unique contexts in Microsoft Dynamics AX:

  • As a status documented on a source document, for example, open or canceled purchase order statuses.
  • In context of its modular component—project management—and as a social commitment. In this context, we use the term contract to name the legally binding characteristic of a social commitment and the source document, for example, project contract.
  • In the vertical layer, partners and customers can implement customizations that support codes of laws that govern contract formation and execution processes specific to a country/region, industry, and vertical market.

Term challenge

In the sentences that follow, insert the term that accurately completes each sentence.

To see if you applied the terms as we have, click the link in each sentence. Each link will take you to the Microsoft Dynamics AX glossary entry for the highlighted term, which shows you which term we have applied – commitment, agreement, or contract.

  1. Compensation is direct or indirect monetary and nonmonentary rewards in exchange for services rendered, or an award for damages sustained by an injury or by the violation of a/an ____________.
  2. An encumbrance is a/an ____________ made by legal entities to reserve budget funds for expenditure obligations.
  3. A trading relationship is relationship that is formed when a buying party and a selling party enter into a/an ____________.