Accounts Payable

Accounts Payable
Process (Procure to Pay)
Generic Training Document
Date: 11 Nov 2015

Version: V1.0
Owner: Saumen Sen
F I N A N C E & A C C O U N T I N G C O U R S E B – P R O C U R E T O PAY
1 WHAT IS ACCOUNTS PAYABLE 4

2 WHY DOES ACCOUNTS PAYABLE ARISE IN THE BOOKS OF ACCOUNTS 4
Accrual Method of Accounting 4
Cash Method of Accounting 4
3 ACCOUNTS PAYABLE AS A COMPONENT OF WORKING CAPITAL 4

4 WORKING CAPITAL CYCLE 5
5 ACCOUNTS PAYABLE DEPARTMENT-DESCRIPTION & FUNCTIONS 6
Importance of the Accounts Payable Department 7
Need for separate A/P Department 7
6 WHAT IS ACCOUNTS PAYABLE (AP) PROCESS? 7

Objectives of AP Process 8
7 PROCURE TO PAY CYCLE 8

Step 1: Pre-Purchase Activities 8
7.1.1 Identification of material to be purchased 8
7.1.2 Preparation of Requisition (Indent) 9
7.1.3 Approval by respective department head 10
Step 2: Procurement/Sourcing Activities 10
7.2.1 What is a Purchase Order (PO)? 12
7.2.2 What is a Work Order (WO)? 12
7.2.3 What information does the PO/WO contain? 12
7.2.4 Types of Purchase Order 14
7.2.5 PO Alteration 16
Step 3: Receiving Activities 17
7.3.1 What is a Packing Slip? 17
7.3.2 What is a GRN (Goods Received Note)? 17
7.3.3 What do you mean by exceptions in receiving? 18
7.3.4 Drop Shipment 18
Step 4: Payment Activities 19
7.4.1 Invoice Processing 19
7.4.2 What is an Invoice? 19
7.4.3 What details does an invoice contain? 20
7.4.4 What is Invoice Processing/Matching? 21
7.4.5 What are the different ways of matching? 21
7.4.6 What is a tolerance limit (Invoice processing) 22
7.4.7 What do you mean by Invoice on Hold? 23
7.4.8 What are the exceptions in invoice processing? 23
7.4.9 What is a Non PO Invoice? 24
7.4.10 Invoice Receipt Modes 24
7.4.11 Payment Disbursement/ Modes of Payment 25
7.4.12 Payment on hold 29
Step 5: Post Payment Activities 29
CONFIDENTIAL Page 2 of 35
© Xchanging 2015, No part of this document may be circulated, quoted
or reproduced without prior approval of Xchanging.
7.5.1 Stop Payment 29

7.5.2 Voiding Check 30
7.5.3 Purchase Returns 30
7.5.4 Debit/Credit Memo 30
8 VENDOR ACCOUNT RECONCILIATION 30

9 MONITORING OF ACCOUNTS PAYABLE 31
10 ACCOUNTS PAYABLE HELPDESK 31
11 AP BUSINESS METRICS 33
12 KEY RISK INDICATORS IN AP PROCESS 33
13 SELF- STUDY QUESTIONS 34
1 WHAT IS ACCOUNTS PAYABLE
Companies have to buy goods (raw materials, machinery, computers etc) and
services for running their business. In most cases, companies do not pay the
suppliers (also called a vendor) immediately after the purchase of goods and services. Instead,
they get credit from the supplier, which means the supplier allows them to make payment after
a period of time.
So, the purchasing company owes money to the supplier from the date of the purchase till the
date the payment is made. Money owed is called a liability and this liability for payment due on
goods and services is called Accounts Payable.
In simple terms, Money due to the supplier who has supplied goods on credit is called accounts
payable. Accounts Payable is a liability to the company
2 WHY DOES ACCOUNTS PAYABLE ARISE IN THE BOOKS OF ACCOUNTS
There are two methods of

accounting:
Accrual Method of Accounting
Cash Method of Accounting
Accrual Method of Accounting

The Accounts Payable arises in the books because of the accrual method of accounting. In a
large number of commercial transactions, the buyer does not pay the seller at the time the sale
happens. This is because the seller sells to the buyer on credit. However, the buyer and the seller
record the transaction in their books of accounts even before the money is received. This
method of accounting wherein the transactions are recorded when the sale happens but
before money thereon is settled is called the accrual method of accounting
Cash Method of Accounting

Cash method under which transactions are accounted for at the time of payment/ receipt of
money
3 ACCOUNTS PAYABLE AS A COMPONENT OF WORKING CAPITAL
Working capital is the money invested by a company to carry out its day to day activities or
more specifically, for financing the conversion of raw materials into finished goods. Among the
most important items of working capital are levels of inventory, accounts receivable and
accounts payable. Analysts look at these items for signs of a company’s efficiency and financial
strength. Thus it is essential for any company to manage its “Accounts Payable” to have a
control on the working capital.
Working capital is made up of:

Current Assets
Current liability
Current assets are called gross working capital.

Current assets- current liabilities is called net working capital
4 WORKING CAPITAL CYCLE
Equity and loans are the main sources of cash for any business organization. Cash is then used to
buy Inventory and also to pay many overhead charges. So the Accounts Payable includes
payment for inventory purchased on credit basis and also the overhead. The inventory can take
the form of raw material, semi-finished goods (WIP) or finished goods. Then the goods will be sold
either for cash or credit. If sold for credit it will lead to Accounts Receivable.
Each component of working capital (namely inventory, receivables and payables) has two
dimensions……………TIME……………and MONEY. When it comes to managing working capital –
TIME IS MONEY.
If it is possible for the business to move faster around the cycle (e.g. collect the money due from
the customers more quickly) or reduce the amount of money tied up (e.g. reduce the inventory
levels), the business will generate more cash or it will need to borrow less money to fund working
capital.
As a consequence, business could reduce the cost of bank interest or will have additional free
money available to support the sales growth or investment. Similarly, if it is possible to negotiate
new terms with the suppliers e.g. get longer credit period or an increased credit limit; business
can effectively create free finance to fund the future sales.
5 ACCOUNTS PAYABLE DEPARTMENT-DESCRIPTION & FUNCTIONS
All business organizations have to make payments to outside parties for day to
day transactions. The accounts payable department acts as an intermediary
between the suppliers and the departments of the company purchasing the
goods. This department is authorized to make payments for the goods
received or services rendered to the company.
There may be some small sized companies where all the purchase related
transactions are dealt with by one or two persons. Such an organization may
not need an accounts payable department. However, as such an
organization grows; it would set up an Accounts Payable Department.
AP in its broader scope entails making payment to suppliers for raw

material, suppliers of fixed assets and payments to employees on their
travel expense (T&E) claims.
Broadly, the activities carried out in the Accounts Payable Department can
be summarized as follows:
 Matching the Invoice with Purchase Order & Goods Received

Note (GRN).
 Verifying the invoice for its authenticity
 Check for necessary approvals in case of Non-PO
based invoices.
 Processing of invoices into the system
 Making payment to respective parties on the due parties
Importance of the Accounts Payable Department

The basic function of the accounts payable department is to make
accurate and timely payments to all suppliers. While the need for
making “accurate” payments is intuitively clear, the need for “timely”
payment should be understood from the strategic perspective.
From the working capital cycle described earlier, it is clear that more the net
current assets, greater is the requirement of working capital. This has a cost and
so every company tries to minimize the working capital locked up in its
operations. This can mathematically be done either by reducing investment in
current assets or by increasing accounts payable. Thus there could be a
temptation to delay payments to one’s suppliers as much as possible to reduce
working capital requirements.
Now, as per modern management thinking, it is not two companies that

compete with each other- it is two supply chains that compete. The cost,
quality and timeliness of a company’s products and services have a direct
dependency on the performance of it’s suppliers and also the supplier’s
suppliers (i.e. it’s supply chain) The business success of any company hinges on
making its supply chain more efficient and effective than that of its
competitors. In such an environment, it becomes imperative to treat one’s
suppliers like one’s partners. With concepts such as Just-In-Time
manufacturing the need for partnering increases even further because the
whole strategy of a company is dependent on the supplier and the company
expects it’s suppliers to deliver much more than it’s traditional suppliers. The
supplier is expected to deliver the right quality of products at the right place at
the right time.
Naturally, with the supplier as a strategic partner, it becomes necessary to

treat him as one and make payments to him on due dates.
Need for separate A/P Department

Internal control practices suggest that people involved in purchasing
transactions should not be involved in payment related activities. So the
accounts payable department should be separate from the purchase
department.
6 WHAT IS ACCOUNTS PAYABLE (AP) PROCESS?
The AP process is a part of the “Procure to Pay cycle” (or P to P cycle). The P
to P cycle starts with the identification of the need to buy goods and services
and ends when payment is made to the suppliers.
In this module, we are going to study the different players, documents and
terms involved in this cycle.
Objectives of AP Process
Paying suppliers on time, but no earlier than necessary Taking discounts when
prudent Preventing duplicate billing / invoice
7 PROCURE TO PAY CYCLE
The following are the activities that form part of an end to end procure to pay
cycle.
These activities are described below in detail.
Step 1: Pre-Purchase Activities

These activities take place before the accounts payable department
comes into picture. Given below is the brief summary of activities involved
in Pre-Purchasing process.
7.1.1 Identification of material to be purchased
The items to be purchased are identified by the production department in

coordination with the planning department. The quantity of goods required
depends on the required production which again depends on the expected
sale. The quantity will also be affected with the inventory policy of the
company that deals with how much inventory quantity should be kept.
Example: A company manufactures product X. It expects to manufacture & sell

20,000 units of X in the next month. Each unit of X requires one unit of Y as a raw
material. The company has an existing inventory of 500 units of Y. As per the
inventory policy, the company should maintain an inventory equal to 5% of the
next month’s sale. How many units of Y should the company order in the next
month.
Solution:
Units of Y required on the basis of expected Production and sales in next
month 20,000
Add: Units of Y to be kept in stock as per inventory policy (5% of 20,000)
1,000
21,000
Less: Existing inventory of Y 500
Units of Y to be ordered 20,500
7.1.2 Preparation of Requisition (Indent)
A document raised by the production department (user department)

requesting the purchase department to do the required purchase (of goods or
services) is called an Indent. This is the starting point of any purchase.
The indent consists of the following details:

 Description of the Item/Service
 Part Number (if applicable), this is a unique number that is allocated to
each item. For example, “Round table with glass top” can be given a
part number “020-555-1892”. The part numbers are updated in the
accounting software and help the company keep track of the stock on
hand.
 Quantity Required of Material (Unit of Measurement (UOM) can be No.,
Kg, Ton, meters etc.)
 Approval from the Department Head
 Approvals from Finance Department (for budget)
Example of an Indent
Your company Logo Purchase Indent

Indent # Department
Date Location
UOM (Unit
Sl. # Item Description of Measure) Quantity
Supplier
Recommend Date required
ed
Specific Remarks
Approvals Dept. Head Finance
7.1.3 Approval by respective department head
This is an important activity in pre-purchase from the internal control point

of view. The approver may exercise a few checks before approving a
request.
Step 2: Procurement/Sourcing Activities

Purchase Department: Medium & large scale companies generally
establish a separate department to facilitate purchases. The main function
of the purchase department is to analyze the different suppliers available in
the market on the basis of cost, quality and delivery and place orders on
the best suppliers. The purchase department will have dedicated
professionals working on the specialized process thereby reducing costs and
increasing efficiency.
Purchase department may follow two routes to decide upon the vendor on
whom the order is to be placed.
Route 1. Calling for quotations for items to be purchased
Route 2. Placing the order with a predetermined vendor

developed specially to supply that particular component to the
company
Route 1: Calling for Quotations
a) Receiving Material Requisitions/Indent
The approved indent is received by the procurement department

based on which it initiates the process to make purchases from the
market.
b) Check for necessary Approvals
It is the duty of procurement department to see that all the indents

received from the respective departments have necessary approvals.
c) Vendor Evaluation-Identify the suitable vendors
Once the material requisitions/indent is received by the procurement

department with proper approvals, they start listing / identifying
available vendors in the market who deal in that particular material /
service. This step is aimed at making a list of prospective vendors who
are best in market in terms of quality, price and payment terms and
delivery terms.
d) Request for Quotations (RFQs)

Once the list of prospective vendors is finalized, procurement department sends
requests to prospective vendors for quotations for the goods/services to be supplied.
Vendors are further short listed based on the quotations received. Typically as per
business practice at least three quotations are asked for.
e) Negotiations
After further short listing of vendors, the procurement department does
necessary negotiations with regard to the most favorable price, quality
of goods and acceptable credit terms etc, in the interests of the
company.
f) Selection of the Best Vendor
Once the negotiations are over, the sourcing team prepares the final
list of vendors who are ready to supply goods / services as per the
negotiated terms, and this approved vendor list is maintained in the
data base by the procurement department for future purchases.
g) Supplier or Vendor Set-Up
_ Once a new supplier has been identified and approved, that supplier
needs to be first set-up in the company’s records before transacting with
him.
_ Supplier set up is an activity through which the company assigns a

unique code to identify that supplier. In all the future transactions with
that supplier, the company uses this code (ID).
_ Normally, the purchase department will send the list of newly approved
suppliers to the person creating the ID. The supplier setup screen shows
relevant details of this supplier such as
Supplier’s name
Details of items that this supplies
can supply Address of the supplier
Bank details of the supplier
Commercial terms agreed upon with this supplier (e.g.
Credit period) Maximum amount of goods or services that
can be purchased from the
supplier
_ The purchase department cannot raise a Purchase Order unless it has a

valid supplier ID for the supplier.
Note: A one time vendor is one from whom we make a purchase

only once. A separate series of vendor ID will be used for one time
vendors
Route 2: Placing the order with a vendor developed specially for a

component
Rather than start searching for a vendor every time an indent is received, in many
companies, the purchase department is expected to carry out a development of a
team of vendors with whom a relationship of partnership is developed. Often the
company actually helps such vendors in developing the product/ component. This
approach enables the company to have a guaranteed high quality source for the
component thereby gives the company a competitive advantage in the market
7.2.1 What is a Purchase Order (PO)?
A company has to enter into agreement/contracts with the supplier for

procuring goods or services on the agreed terms. Such agreements/contracts
are called purchase orders when the contract is for procurement of physical
goods.
Purchase orders are raised by the purchase department. These documents can
also contain penalty clauses. Companies use different series of POs for raising
orders on special types of vendors such as vendors for bulk purchases, imports
and fixed assets. Although the format of purchase/work order used by various
companies may differ, this document typically contains following details.
7.2.2 What is a Work Order (WO)?
If an order is raised to the supplier for procuring services it is called a works order.
7.2.3 What information does the PO/WO contain?
Companies use different series of POs for raising orders on special types of vendors
such as vendors for bulk purchases, imports and fixed assets. Although the format
of purchase/work order used by various companies may differ, this document
typically contains following details.
 Name & address of the company issuing purchase/work order

 PO Number & Date- The computer will generate a unique
number for every PO that is raised. This is called the PO number.
 Name/Address of the supplier
 Description of goods or services ordered. For example while
buying furniture, the description can be “Round table with glass
top” or “six feet cupboard”
 Part number (if applicable) to identify the specifications of the goods
purchased
 Quantity ordered along with delivery schedule, if any
 Penalty clauses if applicable (Penalty could be levied for
later delivery, poor quality of goods delivered etc)
 Delivery schedule: While placing an order with a supplier,
the customer gives the delivery schedule. The delivery
schedule gives details about dates on which the goods have
to be delivered and will help the vendor plan for the goods
well in advance.
Example, A PO ordering for 50 round tables with glass tops could

give the following delivery schedule:
03rd January 2008 20 units
th
15 January 2008 10 units
st
31 January 2008 20 units
 Price: The price should include relevant information on freight/
taxes/ insurance etc
o Freight: It is the charges paid by the company for
transporting the goods from the vendor’s factory to the
company’s factory or warehouse. The freight could be
borne either by the supplier or the customer depending on
the agreement.
o Tax: A tax is a financial charge or fee which is imposed by
different state or central governments on sales
transaction. The seller has to collect the tax from the
customer on behalf of the government and then pay that
money to the government.
o Insurance: There is always a risk that goods being sold
could get damaged/ lost while in transit. It is a normal
practice to insure the good while in transit. The insurance
cost could be borne either by the supplier or the customer
depending on the agreement.
 ‘Bill To’ and ‘Ship To’ Address: Various addresses of the customer
and the supplier are mentioned on the PO.
o Bill to Address: The customer’s address to which the
supplier has to send the invoice is called as Bill to address.
o Sold to Address: The customer’s address from which the
purchase order has been raised is called the sold to address.
o Ship to Address: The customer’s address to which the
goods ordered need to be shipped or sent by the supplier
is called Ship to address. It is the point of delivery of the
goods as specified in the purchase order. Ship to address
would be the factory or warehouse of the customer
 Payment Terms: Payment terms are the terms and conditions on

which payment will be made by the customer to the supplier.
The main payment term is the “due date” of the payment.
Payment terms often give an option to the purchasing company
to pay the invoice before the due date and take a discount
available for early payments.
Some commonly used terminology used to communicate

payments terms is as below:
o Net 30 – This means the buyer must pay within 30 days of

date of invoice _ 2/10 net 30 - This means the buyer
must pay within 30 days of the date of invoice, but will
receive a 2% discount on the invoice amount if they pay
within 10 days
o 3/7 EOM - this means the buyer will receive a cash
discount of 3% if the bill is paid within 7 days after the end
of the month
o 3/7 EOM net 30 - this means the buyer must pay within
30 days after end of month, but will receive a 3% discount
if they pay within 7 days after the end of the month
o 2/15 net 40 ROG - this means the buyer must pay within
40 days of receipt of goods, but will receive a 2% discount
if paid in 15 days
 Other relevant information/ Terms & Conditions, if any
7.2.4 Types of Purchase Order
1. Standard Purchase Order: These are the most commonly used

purchase order wherein the buyer knows all details pertaining to the
goods and services to be purchased, such as cost, quantity,
payment terms, delivery schedule etc. the supplier can execute the
order without any further input from the customer.
2. Blanket Purchase Order: A Blanket Purchase Order is a purchase order

issued to a vendor from which specified purchases may be made for a
specified period of time and for a specified dollar limit. When repeated
purchases of the same type of supply item are expected, multiple
Purchase Requisitions may be eliminated by submitting one Purchase
Requisition to establish a Blanket Purchase Order. Blanket purchase
orders are used when there is a need to repetitively purchase the
same items from the same vendor and where delivery schedules
have not been firmed up. The material ordered for is supplied in
installments. A document called purchase order release is created as
and when delivery is expected, specifying what to ship and where. When
the ordered dollars have been purchased, a new purchase order must be
raised.
It is advantageous to the buyer because it allows him to fix up a

rate for future purchase and gives him an assured source of supply.
It is beneficial to the seller because it gives him assured volumes of business.
3. Contract Purchase Order: A contract PO is created with suppliers

who agree on specific terms and conditions such as payment terms,
discounts allowed without indicating the goods and services that will be
purchased. This will be used for purchasing from a supplier from
whom we can buy a large variety of items. Buyer can later issue
standard purchase orders for specific items required to be purchased
giving a reference of the contract agreement. This saves a lot of time in
negotiations while raising subsequent specific POs on such a supplier.
4. Planned Purchase Order: It is a long-term agreement where the buyer has

committed to buy items or services from a single source. The buyer must specify
tentative delivery schedules and all details of goods or services that are to be
purchased, including quantities and estimated cost. Even in this case a

purchase order release will be raised to initiate delivery.
Planned purchase orders help in reducing the inventory and costs throughout
the supply chain. In the absence of planned POs, the supplier would have to
hold the inventory on behalf of a customer especially in situations where the
buyer is a JIT manufacturer. This is because, the supplier will be penalized if he
is not able to supply to a JIT manufacturer on time and so is forced to
maintain an inventory. Because of a planned PO, the supplier has good
visibility on the delivery schedules and he can manage his own inventories
more effectively thereby making the whole supply chain efficient
Types of goods/services purchased

A broad classification of the goods/ services from procurement angle is:
o Inventory/ Raw Materials
o Capital Items
o Operating Expenses
o Miscellaneous Items.
Comparison in Brief:
Category Inventory/ Capital Items Operatin Misc.

Raw Materials g
Criteria Expenses
Frequency High Low High High

of
Occurrence
Definition An unprocessed Goods, such as Expenses that Expenses that
natural resource or machinery, used arise during the support the
product used in in the production ordinary course of operations of
manufacturing of commodities. running a business the business e.g.
e.g. Leather for e.g. research and publicity,
Shoes, wood & These are used in development, training etc.
steel for furniture, manufacturing power, water,
Aluminum for the products in repairs &
Aircrafts. which maintenance of
organization machinery etc.
deals.
A/P to Tax charged by Depending on If expenses are ordered by way of
Look For Vendor. Invoices company’s Purchase/work Order, the treatment
may be short process, Invoices is similar to processing P.O. based
paid by issuing a are supported by invoices. If the expenses which are
tax exemption user department’s paid as a Non-PO and extra care
certificate to confirmation of should be taken in processing these
the vendor. the installation of invoices. One has to look for
capital items. Approvals for processing these
invoices.
7.2.5 PO Alteration
Alteration is modification of the purchase order issued to the vendor.
Why PO Alteration? ·
If the vendor rejects a PO
If the vendor wants the PO to be issued with some
modifications
If the sourcing department notices errors in PO; e.g. PO raised on
the wrong vendor name, giving insufficient information on PO
etc
Solution:
 Fresh PO is issued, cancelling the old PO
 Original PO is modified and re-issued
Copy of a Purchase Order:
Step 3: Receiving Activities

The supplier will ship the goods to the customer as per the specifications of the PO.
The receiving department (also called as store) in the customer’s organization
receives the goods and checks whether the goods received are of the required
quantity and quality as per the PO
7.3.1 What is a Packing Slip?

The goods are received at the dock along with a packing slip from the
supplier. A packing slip is a document prepared by the supplier that lists
down the actual description and quantities of material being loaded on the
truck.
The packing slip will also have a PO reference.
The people on the dock will check the packing slip with the PO.
7.3.2 What is a GRN (Goods Received Note)?
The receiving department of the customer prepares a document called GRN

(Goods Received Note) as soon as it receives the goods. The GRN has many
columns, e.g., item description, quantity received, quantity accepted,
quantity rejected and remarks columns to be filled up. These columns will be
filled at different stages of the receiving process.
As soon as the goods are received, the “description” and “quantity received”
columns of the GRN will be filled.
The goods then go through an initial round of quality and other checks.
Goods can be rejected if they do not pass the quality and other checks.
Other checks include checking for late delivery, wrong description etc. If any
of the goods do not pass these quality or other checks, they will be rejected
and the “Accepted” and “Rejected” columns in the GRN will be filled.
Format of GRN
Goods Received Note
Supplier: GRN #:
Supplier Account #: GRN
Date:
Delivery note
#: Delivery note
date:
Carrier: Checker:
Order # Description Quantit Quantit Quantity

y y Rejected if
Receive Accepte damaged
d d
7.3.3 What do you mean by exceptions in receiving?

Often, quantities received are different from those ordered. Companies set
tolerance limits to decide whether or not a particular shipment should be accepted
when the quantities differ. If the shipment is within the tolerance limit, it will be
accepted
Companies can have policies to set the tolerance limit. For example it will give
the instruction to the receiving department saying, if the shipment is + or –
Qty. 2, accept the shipment. In that case if the goods ordered are Qty 4 and
received is Qty 6, the company will still accept the shipment because it is
within the tolerance limit set by the company. But if the quantity received is 8,
it will not be accepted as it is outside the tolerance limit.
7.3.4 Drop Shipment
Drop shipment is a product delivery method in which the customer receives

the product directly from the manufacturer but, of course through the retailer
or seller. The retailer acts as a middleman between manufacturer and
customer.
The activities involved in receiving are:
Quality Checks:
Once goods are received from the vendor, these are checked for
quality. Only after meeting the requisite quality standards, are the goods
certified and accepted.
Acceptance of Goods:
After meeting the quality standards the goods shipped by the vendor are
accepted by the receiving department. After accepting the goods, a
document called Goods Received Note (GRN) is created at the inward

stores. It shows the quantity of goods received and quantity of goods
accepted after passing the quality test.
Inspection Report:
If the items being purchased are of a technical nature, the items may have
to undergo a thorough technical test. On passing these tests, the quality
department will prepare an inspection report which will be used as a
document for a four way test (described later in the notes)
Rejection of Goods:
If the goods shipped by the vendor do not meet the specified quality
standards or if there is any other issue with the goods (e.g. late delivery,
wrong description), those goods can be rejected and sent back to the
vendor by the stores department.
Goods Returned:
There may be a case where in the vendor would have shipped the goods
beyond the quantity mentioned on the purchase order. In such cases the
receiving department may return those excess goods to the vendor. Even in
situations wherein out of a lot only few units are defective, those defective
units can be returned back to the vendor by the procurement department.
Step 4: Payment Activities

After goods are received and accepted, it is an obligation of the company to
pay its vendors. Let’s look at the set of activities for making payment to
vendors:
7.4.1 Invoice Processing
Once the ordered goods are dispatched, the supplier will send a copy of
invoice for payment to the customer. Sometimes, the invoice may be received
along with the goods and sometimes it could be received before or after the
receipt of the goods.
7.4.2 What is an Invoice?
An invoice is a document raised by a supplier on a customer demanding

payment against the goods supplied or services rendered. It contains the
details of products, quantities and agreed prices for products or services which
the supplier has supplied or provided to the buyer. An invoice indicates that,
unless paid in advance, payment is due by the buyer to the seller. Invoices are
often called bills.
7.4.3 What details does an invoice contain?

 Invoice number and date
Invoice Number: It is a number or combination of numbers and characters
that uniquely identifies an invoice within the system. It is generated
automatically by the system to avoid duplication of numbers.
 Invoice Date: It is the date on which the invoice is created.
 Purchase order number
 Tax ID number
o TIN (Tax Identification Number): It is a unique number
assigned by the tax department to business entities for the
purpose of identification. All entities must have Tax ID to file the
tax returns.
 “Bill to”, "sold to", “ ship to” addresses and "remit to" addresses
o Remit to address: The supplier’s address to which the customer is asked to send
the payment is called the Remit to address
 Terms of payment including due date, discount due date and discount amount
o Due date: It is the date on which a particular invoice becomes payable. For
example, an invoice may carry due date as 1st January 2008. That means,
that invoice should be paid on or before that date.
o Cash Discount (Early payment discount): It is a reduction allowed on
the invoice price to the customer for making an early payment of the
invoice. The word early means – before the due date.
 Line-item: When more than one item is sold against one invoice, each of those items
has to be separately mentioned on the invoice. Since each of these items will be
shown on a separate line on the invoice, it is called a line item. Each line will have
details of description, quantity and price of the relevant item.
 Shipping method and cost: Shipping can be by road, air, sea or rail. The name of the
carrier / transporter will also be specified. The cost of shipping, if to be borne by the
customer will also be added as a separate line item in the invoice.
 Total number of items and sum of amount due: This summarizes the total amount to
be paid to the supplier.
Format of an Invoice:
INVOICE
[Your Company
Name] [Your
Company Slogan]
[Street Address] INVOICE #

[City, ST ZIP Code] DATE:
Phone [509.555.0190] Fax [509.555.0191]
TO: SHIP TO:

[Name [Name]
] [Company
[Company Name] Name] [Street
[Street Address] Address]
[City, ST ZIP Code] [City, ST ZIP Code]
[Phone] [Phone]
7.4.4 What is Invoice Processing/Matching?
Before making the payment on an invoice, it is necessary to check whether

or not the invoice is in order. There is a need to match the invoice with other
relevant documents, i.e. PO and the GRN in order to ensure that the goods
received have been ordered by the company (Source Document – PO)
and have been received and approved (Source Document – GRN). If the
documents match, payment is to be made to the supplier, else the case has to
be investigated and resolved.
7.4.5 What are the different ways of matching?
It is possible to carry matching in various ways. These are called two way
matching, three way matching and four way matching.
a) Two Way Match
It is the process of verifying the purchase order information with the invoice
information. The PO and Invoice should match within the acceptable
tolerance limit to make the payment. AP department does the following
tests in case of a two way matching
Is Invoice price=Purchase order price?
Is Quantity billed=Quantity ordered?
b) Three Way Match
It is the process of verifying whether the purchase order, invoice and receiving
information (Goods Received Note) matches within the acceptable tolerance
limit or not. In three way match, typically, quantity and price as per PO with
quantity and price as per invoice and quantity received as per the GRN are
compared. The following criterion is used by the AP department.
Is Invoice price=Purchase
order price? Is Quantity
billed=Quantity ordered? Is
Quantity billed=Quantity
received?
c) Four Way Match
It is a process of verifying whether the PO, invoice, GRN and also the
acceptance report (Inspection Report) matches within acceptable tolerance
limit or not. This would be done in case of material that is of a technical in
nature and which has a strict quality requirement. The following criterion is
used by the AP department.
Is Invoice price=Purchase
order price? Is Quantity
billed=Quantity ordered? Is
Quantity billed=Quantity
received? Is Quantity
billed=Quantity accepted?
After an invoice has been processed and found to be OK for payment, the
same is entered into the accounting system through the accounts payable sub
ledger. Any deviation required from the normal invoice processing procedure is
called an exception and every exception needs to be properly researched and
authorized.
7.4.6 What is a tolerance limit (Invoice processing)
Sometimes, there could be minor differences in the invoiced amount and the
amount as calculated as per the PO. In such cases, many companies have
a policy that the full payment as per the invoice should be made provided
the difference between the two amounts is not more than a specified dollar
amount. This is called the tolerance limit for invoice processing.
7.4.7 What do you mean by Invoice on Hold?
A company may not pay all the invoices which have come for the payment.
Such invoices are said to be invoice on hold. The payment against such an
invoice will be made only after the hold on the invoice is removed. Some of
the reasons for keeping an invoice on hold are:
 Missing invoice number or PO number

 Invoice is not clear i.e. it cannot be read because of damage, print quality
etc.
 Wrong or incorrect PO number mentioned on the invoice
 Supplier address on the invoice is different from that on the database address
 Unit price in PO is different from the unit price of invoice (difference is
more than the tolerance limit)
 Quantity in the invoice is different from quantity mentioned on the PO and
GRN
7.4.8 What are the exceptions in invoice processing?
Sometimes, although the invoice does not match, a decision is taken to

make payment against that invoice. Any such deviation from the normal
invoice processing procedure is called an exception. Exceptions apply to
both PO and Non PO based invoices. Examples of exceptions are:
 Making full payment against an invoice when the quantity

received and invoiced is more than the quantity ordered
 Making payment against a Non PO invoice when invoice has not
been authorized by the approver but a oral confirmation has been
received
 Rate variation between PO and invoice
Process Overview:
7.4.9 What is a Non PO Invoice?
Non PO invoices are the invoices issued for utility bills such as Rental charges,
Water bills, Telephone bills, Electricity charges. They are also used in case of
services where no WO is raised.
While making payment against Non PO invoices, approval from designated

authority is very important. This is so because, unlike in a PO invoice, there is
no prior approval of the expenditure. That is why these invoices are sent for
approval before payment. Since there is no PO for these invoices, no
matching is carried out. They are paid on the basis of the approval of the
authorized person.
7.4.10 Invoice Receipt Modes
Company can receive the invoices in different modes. It depends upon the
working functionalities and nature of company. It can be broadly classified
under following categories
 Paper Invoice: Invoices received through fax or courier. Typically
majority of the invoices processed by the AP department will be
paper invoices.
 Web Based Invoice: Compared to a paper invoices a web based

invoices is the more advanced way of receiving the invoices from the
vendor.
Under this method, vendors are given the user Id and password to
access the company’s website so that they can create the invoices
online and submit it for the payments directly. This allows them to view
even their payment status.
Advantages:
 Reduction in manual work for the customer
 Much faster compared to traditional invoice
 Risk of loss and damage to invoice is eliminated
Disadvantages:
 Results in duplicate data entry for the supplier. The supplier would prepare
an invoice for his own accounting purpose, and he would have to feed
the information second time in the clients data website.
Electronic Data Interchange (EDI)

EDI is a way of transferring the business organization having disparate
ERPs in a computer readable format with a minimum human
intervention. It’s a form of E-commerce.
EDI is a standard format for exchanging business data. In EDI, the

computer-to-computer exchange of structured information takes place
by agreed message standards, from one computer application to another
by electronic means and with a minimum of human intervention. It’s a
form of E-commerce.
In common usage, EDI is understood to mean specific interchange

methods agreed upon by national or international standards bodies for the

transfer of business transaction data, with one typical application being
the automated purchase of goods and services. The examples of such
applications are EDIFACT, X12, EANCOM, IATA etc.
Organizations that send or receive documents from each other are

referred to as "trading partners" in EDI terminology. The trading partners
agree on the specific information to be transmitted and how it should
be used.
Advantages:
 It saves time and cost to a significant extent
 Reduced paper handling
 Ensures the accuracy of the information
 Reduced error from manual intervention
Disadvantages:
 High set up cost
 Requires the entire business process change
7.4.11 Payment Disbursement/ Modes of Payment
Once the invoices are processed it will be sent for the payment. Payment can
be effected in one or more of the following ways. The mode of payment is
agreed upon at the time of the contract

Check Payment:
_ Check is a negotiable instrument drawn on a bank for making
payment to a specified supplier.
_ Checks are the most common mode of payment
Check run:
Check run process is a program which is run periodically to print all the
checks that are due for payment during that period.
Frequency of check runs depends upon the business policies. It can be

daily, once or twice a week, once in two weeks or so. Some time special
check runs are there to pay urgent\past due Invoices.
Note – Payments will be made on the run date immediately after the
due date. If cash discount is available on an invoice, payment can be
made on the last date on which discount is available. In exceptional cases,
payment can be expedited if aspecial request is made by the vendor
and the case is approved by authorized persons.
After the check run process, the checks are mailed to the “Remit To”
address of the vendors.
Electronic Fund Transfer (EFT):
Electronic Funds Transfer (EFT) is a system of transferring money from one

bank account directly to another without any paper money
changing hands. In other words EFT includes any transfer of a fund that
is initiated by electronic means, such as an electronic terminal, telephone,
computer, ATM or magnetic tape.
The term is used for a number of different concepts:
· cardholder-initiated transactions, where a cardholder makes use of

a payment card
· Electronic payments by businesses, including salary payments
· Electronic check (or cheque) clearing
Different types of EFT’s can be:
Card based EFT: EFT can be initiated by a card holder when a payment
card such as debit card or credit card is used.
Benefits:
· Allows all the type of the payment automatically
· Eliminates the need to write checks
· Saves the time and money on postages and mailing checks
· Ensures the timely payment
· Provides security and confidentiality for all the payments
Wire Transfer:
A wire transfer is an electronic transfer of funds. Here transfer of funds

takes place from customer’s bank account to the vendor’s bank account
electronically
It is used for both domestic and international transfer of funds where no
cash or cheque exchange is involved, but the account balance is directly
transferred from one bank to other.
The co-operative society, Society for Worldwide Interbank Financial
Telecommunications (S.W.I.F.T.) operates a worldwide net to facilitate the
transfer of financial messages. By means of these messages banks can
exchange data for transfer of funds between different financial institutions
For this, vendor should choose wire transfer as the mode of payment
and also provide their banking details at the time of setup.
ACH (Automated Clearing House):
The Automated Clearing House (ACH) is an electronic banking network

operating system. ACH processes a large number of debit and credit
transactions. ACH needs an operator to act on behalf of payer and payee
and the operator acts as a clearing house.
In all ACH transactions instructions flow from an originating depository

financial institution (ODFI) to a receiving depository financial institutions
(RDFI) through an operator. If the ODFI sends funds, it is credit
transaction. Examples of credit payment transaction include payroll
direct deposit, dividend and interest payment, corporate payments to
vendors etc. If the ODFI requests funds, it is a debit transaction and funds
flow in the opposite direction. Examples include collection of insurance
premium, mortgage and loan payments etc.
Direct Deposit:
Direct Deposit is the electronic transfer of a payment from one account

to another account without any paper document. Another name for
direct deposit is GIRO.
Direct deposit differs from check payment. A check is given to the

payee who deposits the same in his or her bank; but in case of direct
deposit, the payer gives instructions to his bank. The bank on receiving
the instruction from the payer, transfers the funds into payees account
directly.
The instruction could be for one payment or for recurring payments. E.g. a
company can give an instruction to bank to directly transfer $ 1000 to the
account of a lessor who has leased office premises to the company or a

transfer of funds from the company payroll account to the personal
savings accounts of the employees.
Advantages:
o There are no cheque to be lost or stolen
o Payment reach the account the day cheque is issued
o Helps avoiding the cheque to be bounced because the deposit is
direct and on time
o It can save the trips to the bank and also avoid the long lines at
tellers or ATMs.
P-Card:
P-card refers to a purchasing card. It is an enhanced credit card issued by

a banking company and given by a business entity to its employees.
Authorized personnel can make small purchases of goods & services using P-
card. P-cards can only be used by the individuals named on the card.
After the individual makes purchases using the P-card, the issuing authority
gets the information on the purchase made & sends the bill to the
company. Once the company receives the bill from the issuing authority, it
will verify the purchases made and the payment will be sent directly to
the bank.
Advantages:
 Significantly reduces paperwork and processing time
 Allows the card holder to purchase required goods and services
quickly o Improves the supplier relations due to faster payments
 Provides improved control over accounting and purchasing
Evaluated Receipt Settlement:
Evaluated Receipt Settlement (ERS) is a procedure for the automatic

settlement of invoices. ERS is a business process between trading
partners that conduct commerce without invoices.
In an ERS transaction, the supplier ships goods based upon an Advance

Shipping Notice (ASN), and the purchaser, upon receipt, confirms the
existence of a corresponding purchase order or contract, verifies the
identity and quantity of the goods, and then pays the supplier.
How does it work?

In ERS the purchaser will have an agreement with the supplier stating
supplier will not create invoice for ordering transactions, but purchaser
will post the payment directly based on the information contained in
purchase orders and services entries. A list or catalogue of products

and prices is sent by the supplier to its purchaser on regular intervals. A
purchaser using the pricing information sent by the supplier places an
order. Usually a purchase order specifying quantity, product type,
price, freight, tax, etc. is generated. A supplier acknowledges the
order by sending an ASN to the purchaser. The supplier ships the goods
with an itemized bill of lading or packing slip which references the
purchase order or contract number. The purchaser matches the goods
receipt to the purchase order, or contract to validate accuracy. Now
instead of waiting for suppliers invoice the purchaser calculates
payment based on price information stored in their computer or from
the catalogue sent by the suppliers. The payment is made either by
electronic funds transfer (EFT) or check.
Advantages:
 Purchasing transactions are closed more quickly
 Communication errors are avoided
 No price and quantity variances in invoice verification
 Elimination of non-value-added work like reconciliation
7.4.12 Payment on hold
Sometimes a company decides not to make a payment to a supplier even

though the invoice has matched. In such situations the payment is said to be
“kept on hold”. Some of the reasons for keeping payment on hold are as
follows:
 Inadequate funds
 To adjust against money due from the supplier, if any.
The hold can be released on a subsequent date based on fund availability and issue
resolution.
Step 5: Post Payment Activities

If it is realized out after making the payment to a vendor that money has
been paid to wrong party, or it was a duplicate payment made by mistake,
it can be corrected in one of the following ways:
7.5.1 Stop Payment
Stop payment means issuing the instructions to the banker not

to honor a particular check. This can be done only if the check is not yet
cashed by the vendor. Check should be stopped for payment in the following
situations:
 If the check is cut to the vendor and has not reached or misplaced or
still in transit
 When the check is cut to a wrong vendor
 Value in the check is not correct
 Check was sent to a wrong mailing address · If the duplicate invoice
has been released
 New vendor remit to address has not been updated in the database
 Any other reason warranting the stop payment
7.5.2 Voiding Check

Voiding the check can only be done when customers are in the possession of
the physical copy of the check. This will be done only when the checks are
mailed to the vendor and the same has been returned back to customer or
when checks sent mailed to vendors have returned undelivered.
7.5.3 Purchase Returns

When the purchases are made by the company, there will be instances when
the goods are returned back to the vendor for the following reasons:
 If the goods supplied are not up to the quality as

agreed ; or
 If the goods are defective; or
 There is an excess supply
In all these situations, a credit note is raised by the vendor to reverse the
purchases and the AP team collects the funds paid to them. If it is regular
vendor doing business continuously, then the amount due can be adjusted
with the future invoice payments for that vendor.
7.5.4 Debit/Credit Memo
Debit & credit memos are the documents that communicate formally to the
vendor that the company has done adjustments during the pay transactions.
Debit Memo: It is a document raised on the vendor indicating that the

vendor owes the specified amount to the company. Reasons can be
wrong/duplicate payments made to vendors.
Credit Memo: It is a document indicating the amount owed by the business

to the vendor. Reason can be late payment charges due to the vendor, etc.
8 VENDOR ACCOUNT RECONCILIATION
The balance for amount payable to the Supplier in the customer’s book should
always match with the balance of amount receivable from the customer in the
supplier’s book because both of them records all the transactions occurred
between them in their books of accounts. But in some cases, the difference or
variance can arise. This difference can arise due to one or more of the
following reasons.
 Invoice raised by vendor not received or invoice received but not

recorded in our books
 Invoice is in issue log for clarification
 Payment made to vendor but not recorded in his books / Payment
made to wrong party
 Goods not received or damaged at transit but Invoice received from
vendor
 Goods returned back to vendor, not acknowledged by them
 Purchase order was cancelled after invoice was raised by vendor
Reconciliation team will compare our records with vendor’s statement and
research on the difference based on the items not matching on both the sides
Over and above the vendor account reconciliation, we also have to carry out a
Sub-ledger / GL reconciliation for reconciling total accounts payable liability
appearing in the GL with total of amounts due to each supplier as per sub ledger
9 MONITORING OF ACCOUNTS PAYABLE
There are some indicators with which company can monitor the accounts
payable. One among them is
DPO (Days Payable Outstanding)
DPO is an indicator of how long a company is taking to pay its trade

creditors. It is an operating ratio that helps the company to evaluate how
well a business is managing its payable. The lower the ratio the quicker the
business pays its liabilities.
How to calculate DPO?
DPO= (Accounts Payable X 365)/Average Credit Purchases
Effective management of DPO is major challenge since it directly impacts

the working capital efficiency.
10 ACCOUNTS PAYABLE HELPDESK
After the goods have been supplied by vendors, vendors are sometimes interested
to know:
· Whether goods dispatched have been received;
· Whether invoice for goods supplied has been received;
· Whether payment has been processed as per agreed terms;
· What is the likely date of payment disbursement
· Are there any disconnect on the invoice; etc

To answer all such questions, medium and big organizations generally set
up an accounts payable helpdesk, which is the front face to vendors to
address their queries as mentioned above.
Since accounts payable helpdesk is a front-end function, it allows a relatively smooth

environment to the people who do the back-end process. In the organizations that
have accounts payable helpdesk functional, vendors are discouraged to contact
end user, purchase department or finance department for payment status queries.
The source of information for accounts payable helpdesk is the ERP system on
which real-time updated information about transactions with vendors is
always available. Typically, accounts payable helpdesk functions as an
incoming call center.
Recommended metrics for tracking efficiency of AP Process
Metrics Metrics definition Measuremen Indicativ Remarks

t e SLAs*
Accuracy % Accuracy {fatal} = Manual 95 to 98% The Quality

(1 – (No. of (Sampling of
defective
transactions/ No. of to
begin with) transaction is
usually separated
transactions into “Fatal” and
audited)) * 100 Automated “Non fatal” errors.
100% (As Fatal is mandatory.
process
Accuracy {non-fatal} matures and 95 to 98%
= (1 – as per
(No. of defective possibility of
transactions / No. of automation)
transactions
audited)) * 100
Productivity (No. of transactions Workflow tool 95 to 98%

processed within the (100% data)
measurement period
/ No. of transactions
(target) to be
processed within the
measurement
period)*100
TAT (Turn (No. of transactions Workflow tool 95 to 98%

Around Time) processed “on time” (100% data)
for Invoice within the
processing / measurement period
Supplier Query / No. of transactions
response to be processed
within the
measurement
period)*100
11 AP BUSINESS METRICS
Metrics Metrics definition
Days Payables (Average AP*365 days)/ Average

Outstanding Credit Purchases
Discount earned The percent of discount earned ($)

against available
Write-off The dollar value of vendor debt written off
Duplicate payments Duplicate payments (volume / $ value)
All metrics need to be converted into targets after thorough historical analysis
of client data and after base-lining for three months.
In most of the situations client will have business metrics to evaluate
effectiveness of AP process. During outsourcing process effectiveness metrics
becomes important; however client may have less visibility about these
metrics and data to support. Sometimes client may not insist or agree for
addition of process metrics as a part of SLAs.
Process metrics are essential to be part of managing the operation as they

are directly related to the business metrics. There are multiple definitions
for a single metrics, it is essential to follow unified definitions as they are
validated for appropriateness.
In scenarios where client does not agree for addition of process metrics as a
part of formal SLAs, process metrics have to be tracked as internal SLAs.
12 KEY RISK INDICATORS IN AP PROCESS
Vendor Master Creation and Maintenance -
· New master creation without approval as a percentage of total vendor base
· Number of duplicates in the vendor master
Raising Purchase Requisitions –
· Purchase requisitions (indents) raised outside the sanctioned

budget limit and without approval
· Requisitions are not linked to item details as mapped to suppliers in

the supplier setup
Invoice Processing –
· Number of duplicate invoices posted
Payment Processing-
· Total amount spent on late fees and interest charges
· Amount of pre-payment discounts lost/pre-payment discounts not taken
· Total amount lost through duplicate payments
13 SELF- STUDY QUESTIONS
1. What is Accounts Payable?

2. What are the two methods of accounting?
3. What are the different functions of Accounts Payable department?
4. How do you calculate the net working capital?
5. Which department prepares the Indent?
6. What are the two routes in procurement the purchase department can follow to
decide on which vendor the order need to be placed?
7. What is a purchase order and what are the different types of purchase order?
What information does a Purchase Order contain?
8. Who is a one time vendor?
9. What is vendor set up? What are all the details required during the vendor set up
activity?
10. What is drop shipment?
11. What is a ‘packing slip’? Who prepares the packing slip?
12. What do you mean by invoice processing? What are the different types of matching
which is available during invoice processing?
13. What is a Non PO Invoice? Which check is more important while making the payment
against the Non PO invoice?
14. Name the different ways in which payment can be made to the supplier?
15. What is a P-card? How does it works?
16. What are the different ways in which invoice can be received?
17. What is DPO? How do you calculate DPO?
18. What are the different reasons for which the invoice can be kept on hold?
19. What are the situations in which stop payment instruction can be issued to the banker?
20. What is credit memo? Name the reason for raising the credit memo.
21. What are the objectives of AP process?
22. What are the activities that form part of procure to pay cycle?
23. What is an indent and which department prepares it?
24. What details are mentioned in an indent?
25. What is supplier setup?
26. What is the difference between Purchase Order and Work Order?
27. Define the following terms – Freight, Insurance and Taxes
28. What do the following represent – Bill to address, Ship to address and Sold to address
29. What are some of the commonly used payment terms?

30. Explain the unique features of these Purchase orders – Standard PO, Blanket PO, Contract
PO and Planned PO.
31. What are some of the reasons why Purchase orders are altered?
32. What is a packing slip?
33. What is a Goods Received Note (GRN)?
34. What is an Inspection Report?
35. What do you mean by exceptions in receiving?
36. What is an invoice? What details does an invoice contain?
37. What are the different ways of matching invoices?
38. What is a tolerance limit with respect to Invoice Processing?
39. What do you mean by Invoice on hold?
40. What are the exceptions in invoice processing?
41. What is a Non-PO invoice?
42. What are the different modes of receiving invoices?
43. What are the different modes of payment?
44. What is Electronic Fund Transfer (EFT)? What are the 2 common categories of EFT?
45. What is a P-Card? What are its advantages?
46. Explain how the evaluated receipt settlement system works?
47. What could be some of the reasons for keeping payments on hold?
48. Explain some of the ways in which duplicate payments made can be corrected.
49. What is vendor account reconciliation?
50. What are some of the issues addressed by AP Helpdesk?
Xchanging
Xchanging Tower, SJR iPark
EPIP Area, Whitefield
Bengaluru, 560 066 India
T: +91 (0)80 30540000

E info@xchanging.com
W www.xchanging.com

Accounts Payable

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Accounts Payable

Uploaded by

Copyright:

Available Formats

Accounts Payable

Process (Procure to Pay)

Generic Training Document

Date: 11 Nov 2015

1 WHAT IS ACCOUNTS PAYABLE 4

3 ACCOUNTS PAYABLE AS A COMPONENT OF WORKING CAPITAL 4

6 WHAT IS ACCOUNTS PAYABLE (AP) PROCESS? 7

7 PROCURE TO PAY CYCLE 8

7.5.1 Stop Payment 29

8 VENDOR ACCOUNT RECONCILIATION 30

1 WHAT IS ACCOUNTS PAYABLE

2 WHY DOES ACCOUNTS PAYABLE ARISE IN THE BOOKS OF ACCOUNTS

There are two methods of

Accrual Method of Accounting

Cash Method of Accounting

Accrual Method of Accounting

Cash Method of Accounting

3 ACCOUNTS PAYABLE AS A COMPONENT OF WORKING CAPITAL

Working capital is made up of:

Current assets are called gross working capital.

4 WORKING CAPITAL CYCLE

5 ACCOUNTS PAYABLE DEPARTMENT-DESCRIPTION & FUNCTIONS

AP in its broader scope entails making payment to suppliers for raw

 Matching the Invoice with Purchase Order & Goods Received

Importance of the Accounts Payable Department

Now, as per modern management thinking, it is not two companies that

Naturally, with the supplier as a strategic partner, it becomes necessary to

Need for separate A/P Department

6 WHAT IS ACCOUNTS PAYABLE (AP) PROCESS?

7 PROCURE TO PAY CYCLE

These activities are described below in detail.

Step 1: Pre-Purchase Activities

7.1.1 Identification of material to be purchased

The items to be purchased are identified by the production department in

Example: A company manufactures product X. It expects to manufacture & sell

7.1.2 Preparation of Requisition (Indent)

A document raised by the production department (user department)

The indent consists of the following details:

Your company Logo Purchase Indent

7.1.3 Approval by respective department head

This is an important activity in pre-purchase from the internal control point

Step 2: Procurement/Sourcing Activities

Route 1. Calling for quotations for items to be purchased

Route 2. Placing the order with a predetermined vendor

Route 1: Calling for Quotations

a) Receiving Material Requisitions/Indent

The approved indent is received by the procurement department

b) Check for necessary Approvals

It is the duty of procurement department to see that all the indents

c) Vendor Evaluation-Identify the suitable vendors

Once the material requisitions/indent is received by the procurement

d) Request for Quotations (RFQs)

f) Selection of the Best Vendor

g) Supplier or Vendor Set-Up

_ Supplier set up is an activity through which the company assigns a

_ The purchase department cannot raise a Purchase Order unless it has a

Note: A one time vendor is one from whom we make a purchase

Route 2: Placing the order with a vendor developed specially for a

7.2.1 What is a Purchase Order (PO)?

A company has to enter into agreement/contracts with the supplier for

7.2.2 What is a Work Order (WO)?

7.2.3 What information does the PO/WO contain?

 Name & address of the company issuing purchase/work order

Example, A PO ordering for 50 round tables with glass tops could