The process of recording invoices in the accounts payable ledger starts when you receive an invoice from the supplier/service provider.
Once an invoice is received, there is a specific recording process that helps maintain the accuracy and completion of the financial records.
The accurately designed recording process is considered to have strong internal controls, enhanced efficiency, integration, and automation.
Strong internal controls help ensure transparency throughout the process, while integration and automation lead to efficiency and timely completion of the process.
The frequency of recording invoices in accounts payable seems to be higher as its one of the essential processes.
So, the companies might opt to go for automation of the process instead of going manual. Automation brings productivity, cost-effectiveness, accuracy, and transparency to the overall accounting record.
Let’s s discuss standard steps in the process of recording invoices in the accounts payable ledger.
1 – Create Chart of accounts
That’s the first step of initiating a transaction in the accounting system. It’s the place in the accounting system where all of the accounting transactions reside. This chart of accounts later helps in mapping the financial statement.
For posting transactions in the accounting system, there is a need to open a chart of accounts for payable. Mostly, accounting systems contain a built-in chart of accounts.
However, you still may need to add/modify some of the charts of accounts to fulfill your accounting needs.
2 – Set up the vendor/adding vendors
That’s a very important step from the control’s point of view. There is a need to add vendors based on the application of certain safeguards. There is a need to exercise certain safeguards as ghost suppliers can be added to get fraudulent payments from the company.
So, there is a need to add sufficient vendor details like goods or services provided by them, their tax details, address, contact information, etc.
The most important thing is to get approval from the appropriate authority for the addition of the vendor.
3 – Verification of the information
The third step is to verify the details on the invoice received. The invoice received needs to be assessed against a certain set of information that includes the following.
- Date of invoice creation by the vendor.
- Date of an invoice sent by the vendor.
- Details of the purchase including the quantity of the goods and price.
- Name of the vendor and buyer (purchasing business), contact information, billing information, and contact person.
- Information for the processing of the payment like method and time etc.
Buying company needs to ensure the given information is accurate. It can be done by reconciling the information with prior documents like a purchase order or purchasing agreement and receiving notes.
For instance, the quantity of purchase on an invoice can be reconciled with the number of goods received in the note. Similarly, the price of the goods can be reconciled with the purchase order.
Once information is verified, it’s forwarded for further processing. On the other hand, if there is some error, it’s forwarded back for corrections.
4 – Data entry
The fourth step is to enter data into the accounting system/accounting record. All the information like price, quantity, description of the goods, and payment date are recorded in the accounting system with referencing via code.
This referencing of recorded transactions helps track and map the financial transactions while making payments and preparing the financial statement.
An accounting record may be manual or automated. If the company uses an automated system, it increases the efficiency and cost-effectiveness of the process.
On the other hand, a manual system consumes more time for the accounting staff, and there is a risk of human error.
Studies have shown that automated systems help to reduce invoice processing costs by 75% to 85%. Further, it greatly helps to reduce the chances of error due to human ignorance.
Data entry is considered to be a clerical task, but it can be sensitive and cause an error for the whole accounting system if work is not done with care.
5 – Getting approval
Once data is entered into the accounting system, it’s forwarded to the approving authority. If the system is manual, it’s forwarded in the form of paper. An approving authority reviews the details and ensures that the details of payment and other details are correct.
Automated accounting systems provide an option to park an entry in the accounting system. Once an accountant enters the details of the invoice, it pops us on the screen of approving authority.
An approving authority has the option to review the invoice and related supports for approval. Once the transaction is approved, an accountant can proceed with making payment of the invoice.
Accounting for entering invoice
Knowledge of accounting is required while posting transactions in the accounting system. Accounts payable is credited with the amount of the invoice and debited with the goods purchased/services received by the company. Most of the invoices are debited for,
- Expenses incurred by the company like salaries, wages, repair & maintenance, rental expenses, and advertisement expenses, etc.
- Purchase the property, plant, and equipment like furniture & fixtures, computers, vehicles, etc.
- Payment for prepaid assets like prepaid insurance, prepaid rent, and others.
An accountant needs to understand the coding of the accounting system and post the transaction in relevant codes.
For instance, purchased goods for manufacturing should be debited in the head of the cost of sales, and operating supplies should be posted in the codes of administrative and operating expenses.
How does accounting software helps in accounts payable management?
An automated accounting software speeds up the process of the accounts payable management from initial recording to payment of the balance to the vendors.
With accounting software, you can better manage vendors, record expenses accurately, increase the speed of approval, make timely payments to the vendors, and do proper management of the accounting record.
Why is payable management something more than paying invoices?
Payable management is something more than paying bills on time because appropriate management of the payables helps to maintain the business’s reputation, build relations with the suppliers, eliminate the cost of late payment for the vendors, and even avoid penalties in some cases.
Frequently asked questions
What are the risks associated with the recording of an invoice?
The risks associated with invoice recording include an error in recording, fraudulent invoicing, paying the same invoice twice, not recording genuine invoices, and not keeping a record of the invoices to be paid and that have been paid.
What’s the impact on financial statements if invoices are not recorded on a timely basis?
If invoices are not recorded timely, it will lead to an understatement of liability in the current year. If the same invoice is recorded in the next accounting period, it will lead to an overstatement of liability in that period.
So, due care needs to be taken in with respect to the date of recording or it may lead to a cut-off error.
What is the matching concept of accounting, and how is it relevant to invoice recording?
The matching concept of accounting states that related expenses and revenue should be recorded in the same period.
In other words, related expenses should be recorded in a period when the economic benefit is obtained. For instance, rent for May must be recorded in the same month irrespective of the fact that payment is made or not.
It’s relevant to invoice recording because an accountant needs to ensure all the invoices are recorded in the system on time. This concept introduces the accrual basis of accounting.
What are the (KPIs) – Key Performance Indicators for a system of accounts payable?
The KPIs for accounts payable include
- Average time of invoice processing.
- Percent of errors in the payment.
- Discounts obtained from suppliers on the invoice.
- Average time of invoice approval.
- Percentage of e-invoice
What’s the role of PO in posting the invoice?
PO helps in assessing the accuracy of the invoice received from the suppliers. Terms of the agreement like the number of goods, price of goods, credit period, and payment terms can be reconciled with the invoice received from the supplier.
What’s due on the receipt?
Due on receipt means no credit period is allowed, and payment is due immediately once you’ve received an invoice.