Accounting, or accountancy, is the measurement, processing and communication of financial [1][2] information about economic entities.

Accounting, which has been called the "language of [3] business", measures the results of an organization's economic activities and conveys this information to a variety of users including investors, creditors, management, [4] and regulators. Practitioners of accounting are known as accountants. Accounting can be divided into several fields including financial accounting, management [5][6] accounting, auditing, and tax accounting. Financial accounting focuses on the reporting of an organization's financial information, including the preparation of financial statements, to external users [7] of the information, such as investors, regulators and suppliers; and management accounting focuses on the measurement, analysis and reporting of information for internal use by [1][7] management. The recording of financial transactions, so that summaries of the financials may be presented in financial reports, is known as bookkeeping, of which double-entry bookkeeping is the [8] most common system. Accounting is facilitated by accounting organizations such as standard-setters, accounting [9] firms and professional bodies. Financial statements are usually audited by accounting firms, and are [7] prepared in accordance with generally accepted accounting principles (GAAP). GAAP is set by various standard-setting organizations such as the Financial Accounting Standards Board (FASB) in [1] [10] the United States and the Financial Reporting Council in the United Kingdom. As of 2012, "all major economies" have plans to converge towards or adopt the International Financial Reporting

Accounting Basics: The Accounting Process

By Bob Schneider A A A Filed Under: Accounting Financial Theory, Financial Theory, Accounting By Bob Schneider As implied earlier, today's electronic accounting systems tend to obscure the traditional forms of the accounting cycle. Nevertheless, the same basic process that bookkeepers and accountants used to perform by hand are present in today's accounting software. Here are the steps in the accounting cycle: (1) Identify the transaction from source documents, like purchase orders, loan agreements, invoices, etc. (2) Record the transaction as a journal entry (see the Double-Entry

Bookkeeping Section above). (3) Post the entry in the individual accounts in ledgers. Traditionally, the accounts have been represented as Ts, or so-called T-accounts, with debits on the left and credits on the right.

(4) At the end of the reporting period (usually the end of the month), create a preliminarytrial balance of all the accounts by (a) netting all the debits and credits in each account to calculate their balances and (b) totaling all the leftside (i.e, debit) balances and right-side (i.e., credit) balances. The two columns should be equal. (5) Make additional adjusting entries that are not generated through specific source documents. For example, depreciation expense is periodically recorded for items like equipment to account for the use of the asset and the loss of its value over time. (6) Create an adjusted trial balance of the accounts. Once again, the left-side and right-side entries - i.e. debits and credits - must total to the same amount. (To learn more see,Fundamental Analysis: The Balance Sheet.) (7) Combine the sums in the various accounts and present them in financial statements created for both internal and external use. (8) Close the books for the current month by recording the necessary reversing entries to start fresh in the new period (usually the next month). Nearly all companies create end-of-year financial reports, and a new set of books is begun each year. Depending on the nature of the company and its size, financial reports can be prepared at much more frequent (even daily) intervals. The SEC requires public companies to file financial reports on both a quarterly and yearly basis.

ACCOUNTS PAYABLE

An accounting entry that represents an entity's obligation to pay off a shortterm debt to its creditors. The accounts payable entry is found on a balance sheet under the heading current liabilities. Accounts payable are often referred to as "payables". Another common usage of AP refers to a business department or division that is responsible for making payments owed by the company to suppliers and other creditors.

Accounts payable are debts that must be paid off within a given period of time in order to avoid default. For example, at the corporate level, AP refers to short-term debt payments to suppliers and banks. Payables are not limited to corporations. At the household level, people are also subject to bill payment for goods or services provided to them by creditors. For example, the phone company, the gas company and the cable company are types of creditors. Each one of these creditors provide a service first and then bills the customer after the fact. The payable is essentially a short-term IOU from a customer to the creditor. Each demands payment for goods or services rendered and must be paid accordingly. If people or companies don't pay their bills, they are considered to be in default.

Accounts Payable Process

The accounts payable process or function is immensely important since it involves nearly all of a company's payments outside of payroll. The accounts payable process might be carried out by an accounts payable department in a large corporation, by a small staff in a medium-sized company, or by a bookkeeper or perhaps the owner in a small business. Regardless of the company's size, the mission of accounts payable is to pay only the company's bills and invoices that are legitimate and accurate. This means that before a vendor's invoice is entered into the accounting records and scheduled for payment, the invoice must reflect:

what the company had ordered what the company has received the proper unit costs, calculations, totals, terms, etc.

To safeguard a company's cash and other assets, the accounts payable process should have internal controls. A few reasons for internal controls are to: prevent paying a fraudulent invoice

prevent paying an inaccurate invoice prevent paying a vendor invoice twice be certain that all vendor invoices are accounted for

Periodically companies should seek professional assistance to improve its internal controls. The accounts payable process must also be efficient and accurate in order for the company's financial statements to be accurate and complete. Because of double-entry accounting an omission of a vendor invoice will actually cause two accounts to report incorrect amounts. For example, if a repair expense is not recorded in a timely manner: 1. the liability will be omitted from the balance sheet, and 2. the repair expense will be omitted from the income statement. If the vendor invoice for a repair is recorded twice, there will be two problems as well: 1. the liabilities will be overstated, and 2. repairs expense will be overstated. In other words, without the accounts payable process being up-to-date and well run, the company's management and other users of the financial statements will be receiving inaccurate feedback on the company's performance and financial position.

A poorly run accounts payable process can also mean missing a discount for paying some bills early. If vendor invoices are not paid when they become due, supplier relationships could be strained. This may lead to some vendors demanding cash on delivery. If that were to occur it could have extreme consequences for a cash-strapped company. Just as delays in paying bills can cause problems, so could paying bills too soon. If vendor invoices are paid earlier than necessary, there may not be cash available to pay some other bills by their due dates.

Purchase order
A purchase order or PO is prepared by a company to communicate and document precisely what the company is ordering from a vendor. The paper version of a purchase order is a multi-copy form with copies distributed to several people. The people or departments receiving a copy of the PO include:

the person requesting that a PO be issued for the goods or services the accounts payable department the receiving department the vendor the person preparing the purchase order

The purchase order will indicate a PO number, date prepared, company name, vendor name, name and phone number of a contact person, a description of the items being purchased, the quantity, unit prices, shipping method, date needed, and other pertinent information. One copy of the purchase order will be used in the three-way match, which we will discuss later.

Receiving report
A receiving report is a company's documentation of the goods it has received. The receiving report may be a paper form or it may be a computer entry. The quantity and description of the goods shown on the receiving report should be compared to the information on the company's purchase order. After the receiving report and purchase order information are reconciled, they need to be compared to the vendor invoice. Hence, the receiving report is the second of the three documents in the three-way match (which will be discussed shortly).

Vendor Invoice
The supplier or vendor will send an invoice to the company that had received the goods and/or services on credit. When the invoice or bill is received, the customer will refer to it as a vendor invoice. Each vendor invoice is routed to accounts payable for processing. After the invoice is verified and approved, the amount will be credited to the company's Accounts Payable account and will also be debited to another account (often as an expense or asset). A common technique for verifying a vendor invoice is the three-way match.

Three-way match
The accounts payable process often uses a technique known as the three-way match to assure that only valid and accurate vendor invoices are recorded and paid. The three-way match involves the following:

Only when the details in the three documents are in agreement will a vendor's invoice be entered into the Accounts Payable account and scheduled for payment. Good internal control of a company's resources is enhanced when the company assigns a separate employee with a specific, limited responsibility. The following chart illustrates the concept of the separation (or segregation) of duties involving accounts payable:

When the duties are separated, it will require more than one dishonest person to steal from the company. Hence, small companies without sufficient staff to separate employees' responsibilities will have a greater risk of theft. To illustrate the three-way match, let's assume that BuyerCo needs 10 cartridges of toner for its printers. BuyerCo issues a purchase order to SupplierCorp for 10 cartridges at $60 per cartridge that are to be delivered in 10 days. One copy of the PO is sent to SupplierCorp, one copy goes to the person requisitioning the cartridges, one copy goes to the receiving department, one copy goes to accounts payable, and one copy is retained by the person preparing the PO. When BuyerCo receives the cartridges, a receiving report is prepared. The three-way match involves comparing the following information: 1. The description, quantity, cost and terms on the company's purchase order. 2. The description and quantity of goods shown on the receiving report. 3. The description, quantity, cost, terms, and math on the vendor invoice. After determining that the information reconciles, the vendor invoice can be entered into the liability account Accounts Payable. The information entered into the accounting software will include invoice reference information (vendor name or code, invoice number and date, etc.), the amount to be credited to Accounts Payable, the amount(s) and account(s) to be debited and the date that the payment is to be made. The payment date is based on the terms shown on the invoice and the company's policy for making payments. Lastly, the documents should be stamped or perforated to indicate they have been entered into the accounting system thus avoiding a duplicate payment.

Vouchers
Some companies use a voucher in order to document or "vouch for" the completeness of the approval process. You can visualize a voucher as a cover sheet for attaching the supporting

documents (purchase order, receiving report, vendor's invoice, etc.) and for noting the approvals, account numbers, and other information for each vendor invoice or bill. When the vendor invoice is paid, the voucher and its attachments (including a copy of the check that was issued) will be stored in a paid voucher/invoice file. If paper documents are involved, an office machine could perforate the word "PAID" through the voucher and its attachments. This is done to assure that a duplicate payment will not occur. The unpaid invoices and vouchers will be held in an open file.

Vendor invoices without purchase orders or receiving reports

Not all vendor invoices will have purchase orders or receiving reports. Hence, the three-way match is not always possible. For example, a company does not issue a purchase order to its electric utility for a pre-established amount of electricity for the following month. The same is true for the telephone, natural gas, sewer and water, freight-in, and so on. There are also payments that are required every month in order to fulfill lease agreements or other contracts. Examples include the monthly rent for a storage facility, office rent, automobile payments, equipment leases, maintenance agreements, etc. Even though these obligations will not have purchase orders, the responsibility is unchanged: pay only the amounts that are legitimate and accurate.

Statements from vendors

Vendors often send statements to their customers to indicate the amounts (listed by invoice number) that remain unpaid. When a vendor statement is received the details on the statement should be compared to the company's records. The fact that a company can be receiving both invoices and statements from a vendor means there is the potential of a duplicate payment. In order to avoid making a duplicate payment, companies often establish the following rule: Pay only from vendor invoices; never pay from vendor statements.

What is the three-way match?

In accounting, the three-way match refers to a procedure used when processing an invoice received from a vendor or supplier. The purpose of the three-way match is to avoid paying incorrect and perhaps fraudulent invoices. Three-way refers to the three documents involved: 1. Vendor's invoice which was received and will become part of an organization's accounts payable if approved. 2. Purchase order that was prepared by the organization. 3. Receiving report that was prepared by the organization. Match refers to the comparison of the quantities, price per unit, terms, etc. appearing on the vendor's invoice to the information on the purchase order and to the quantities actually received. After the vendor's invoice has been validated by the three-way match, it can be further processed for payment.

The three-way match is an important step in safeguarding an organization's assets.

Two-, Three-, and Four-way Matching 2-way matching verifies that purchase order and invoice information match within your tolerances as follows:
o o

Quantity billed is less than or equal to Quantity ordered Invoice price is less than or equal to Purchase order price

3-way matching adds a third criterion to verify that receipt and invoice information match with the quantity tolerances you define:
o

Quantity billed is less than or equal to Quantity received

4-way matching adds a fourth criterion to verify that acceptance documents and invoice information match within the quantity tolerances you define:
o

Quantity billed is less than or equal to Quantity accepted

When you match to a purchase order, Payables automatically performs 2-way matching. In the Purchasing Options window you can choose to additionally use 3-way or 4-way matching. You can change the invoice match option at the supplier, supplier site and purchase order shipment levels. If the invoice and purchase order do not match within the tolerances you define for quantity and price, Approval places a matching hold on the invoice. You must release the hold before you can pay the invoice.