Accounts Payable Process (Procure To Pay) : Generic Training Document

Accounts Payable Process (Procure to Pay)
Generic Training Document
Finance Center of Excellence Page 1

Table of Contents
What is Accounts Payable? ___________________________________________ 4
Why does Accounts Payable arise in the books of accounts? _________________ 4

Accrual Method of Accounting ____________________________________________ 4
Cash Method of Accounting ______________________________________________ 4
Accounts Payable as a component of Working Capital ______________________ 5
Working Capital Cycle _______________________________________________ 5
Accounts Payable Department-Description & Functions _____________________ 6

Importance of the Accounts Payable Department ________________________ 7
Need for separate A/P Department ___________________________________ 7

What is Accounts Payable (AP) process? ________________________________ 7
Objectives of AP Process ___________________________________________ 7

Procure to Pay Cycle ________________________________________________ 8
Step 1: Pre-Purchase Activities ______________________________________ 8

a) Identification of material to be purchased _________________________________ 8
b) Preparation of Requisition (Indent) ______________________________________ 9
C) Approval by respective department head ________________________________ 10
Step 2: Procurement/Sourcing Activities ______________________________ 10

What is a Purchase Order (PO)? __________________________________________ 12
What is a Work Order (WO)? ____________________________________________ 12
What information does the PO/WO contain? ________________________________ 12
Types of Purchase Order _______________________________________________ 14
PO Alteration ________________________________________________________ 15
Step 3: Receiving Activities ________________________________________ 16
What is a Packing Slip? ________________________________________________ 17
What is a GRN (Goods Received Note)? ____________________________________ 17
What do you mean by exceptions in receiving? ______________________________ 17
Drop Shipment _______________________________________________________ 18
Step 4: Payment Activities _________________________________________ 19

Invoice Processing ____________________________________________________ 19
What is an Invoice? ___________________________________________________ 19
What details does an invoice contain? _____________________________________ 19
What is Invoice Processing/Matching? _____________________________________ 21
What are the different ways of matching? __________________________________ 21
What is a tolerance limit (Invoice processing) _______________________________ 22
What do you mean by Invoice on Hold?____________________________________ 22
What are the exceptions in invoice processing? ______________________________ 23

What is a Non PO Invoice? ______________________________________________ 23
Invoice Receipt Modes _________________________________________________ 23
Payment Disbursement/ Modes of Payment_________________________________ 25
Payment on hold _____________________________________________________ 29
Step 5: Post Payment Activities _____________________________________ 29

a) Stop Payment _____________________________________________________ 29
b) Voiding Check _____________________________________________________ 29
c) Purchase Returns ___________________________________________________ 30
d) Debit/Credit Memo __________________________________________________ 30
Vendor Account Reconciliation _______________________________________ 30
Monitoring of Accounts Payable ______________________________________ 31

Accounts Payable Helpdesk __________________________________________ 31
Recommended metrics for tracking efficiency of AP Process ________________ 31
AP Business Metrics _______________________________________________ 32
Key Risk indicators in AP Process _____________________________________ 33
Self- Study Questions ______________________________________________ 34

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.
Why does Accounts Payable arise in the books of accounts?
Accounts Payable arises in the books of

accounts because of accrual method of
There are two methods of accounting:
accounting.
• Accrual Method of Accounting
• Cash Method of Accounting AP is a liability to the company.
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

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
Working capital is made up of: of Current assets and
Current Assets Current Liabilities &
Current liability calculated as Current
Current assets are called gross working capital. assets – Current Liabilities
Current assets- current liabilities is called net working

capital.
Working Capital Cycle
Account
Payable
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.
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 dates

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.
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

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.
a) 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
b) 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 of
Sl. # Item Description Measure) Quantity
Supplier
Recommended Date required
Specific Remarks
Approvals Dept. Head Finance

C) 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.
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.
What is a Work Order (WO)?

If an order is raised to the supplier for procuring services it is called a works order.
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:
3rd January 2008 20 units
15th January 2008 10 units
31st January 2008 20 units

Price: The price should include relevant information on freight/ taxes/ insurance etc.
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.
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.
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.
Bill to Address: The customer’s address to which the supplier has to send
the invoice is called as Bill to address.
Sold to Address: The customer’s address from which the purchase order has
been raised is called the sold to address.
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:
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
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
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
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
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/ Raw Capital Items Operating Misc.

Materials Expenses
Criteria
Frequency of High Low High High

Occurrence
Definition An unprocessed Goods, such as Expenses that arise Expenses that

natural resource or machinery, used in during the ordinary support the
product used in the production of course of running a operations of the
manufacturing e.g. commodities. business e.g. business e.g.
Leather for Shoes, research and publicity, training
wood & steel for These are used in development, etc.
furniture, Aluminum manufacturing the power, water,
for Aircrafts. products in which repairs &
organization deals. maintenance of
machinery etc.
A/P to Look Tax charged by Depending on If expenses are ordered by way of

For Vendor. Invoices company’s process, Purchase/work Order, the treatment is
may be short paid Invoices are similar to processing P.O. based invoices.
by issuing a tax supported by user If the expenses which are paid as a Non-
exemption department’s PO and extra care should be taken in
certificate to the confirmation of the processing these invoices. One has to
vendor. installation of look for Approvals for processing these
capital items. invoices.
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:
PURCHASE ORDER
[Your Company Name] PO # [100]

[Your Company Slogan] Date:
[Street Address],
[City, ST ZIP Code]
Phone [000.000.0000]
Fax [000.000.0000]
[e-mail]
[NAME] [NAME]
SUPPLIER [COMPANY NAME] SHIP TO [COMPANY NAME]
[STREET ADDRESS] [STREET ADDRESS]
[CITY, ST ZIP CODE] [CITY, ST ZIP CODE]
[PHONE] [PHONE]
CUSTOMER ID CUSTOMER ID
[ABC12345] [ABC12345]
SHIPPING METHOD Checkers Signature DELIVERY DATE
Qty. Item # Description Job Unit price Line total
Terms & Condition: Subtotal

Sales Tax
Total
Authorized by Date
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.

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.
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 Quantity Quantity Quantity Rejected

Received Accepted if damaged
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.
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.
Wholesaler Invoice Retailer
Or
Purchase Order
Manufacturer
PO
Shipment of Products Invoice
Only End User
(Ship-to
Destination)
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:
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.
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.
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
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
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
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.
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]
[City, ST ZIP Code] INVOICE #
Phone [509.555.0190] Fax [509.555.0191] DATE:
TO: SHIP TO:
[Name] [Name]
[Company Name] [Company Name]
[Street Address] [Street Address]
[City, ST ZIP Code] [City, ST ZIP Code]
[Phone] [Phone]

COMMENTS OR SPECIAL INSTRUCTIONS:
P.O. SHIPPED
SALESPERSON REQUISITIONER POINT TERMS
NUMBER VIA
Due on
receipt
UNIT
QUANTITY DESCRIPTION TOTAL
PRICE
SUBTOTAL
SALES TAX
SHIPPING &
HANDLING
TOTAL DUE
Make all cheque payable to [Your Company Name]

If you have any questions concerning this invoice, contact [Name, phone, e-mail]
Thank you for your business!
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.
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 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 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.
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.
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

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:
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.
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:
o Reduction in manual work for the customer

o Much faster compared to traditional invoice
o Risk of loss and damage to invoice is eliminated
Disadvantages:
oResults 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:
o It saves time and cost to a significant extent
o Reduced paper handling
o Ensures the accuracy of the information
o Reduced error from manual intervention
Disadvantages:
o High set up cost
o Requires the entire business process change

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 a

special 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 world wide 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:
o Significantly reduces paperwork and processing time
o Allows the card holder to purchase required goods and services quickly
o Improves the supplier relations due to faster payments
o 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:
o Purchasing transactions are closed more quickly
o Communication errors are avoided
o No price and quantity variances in invoice verification
o Elimination of non-value-added work like reconciliation
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:
a) 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
b) 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.

c) 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.
d) 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.
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.

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.
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 Measurement Indicative Remarks
SLAs*
Accuracy % Accuracy {fatal} = Manual 95 to 98% The Quality of

(1 – (No. of defective (Sampling to transaction is

transactions/ No. of begin with) usually separated
transactions into “Fatal” and
audited)) * 100 Automated “Non fatal” errors.
100% (As Fatal is mandatory.
Accuracy {non-fatal} process 95 to 98%
= (1 – matures and
(No. of defective as per
transactions / No. of possibility of
transactions automation)
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
AP Business Metrics
Metrics Metrics definition
Days Payables (Average AP*365 days)/ Average Credit

Outstanding 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.
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

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?

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Accounts Payable Process (Procure to Pay)

Generic Training Document

Finance Center of Excellence Page 1

Why does Accounts Payable arise in the books of accounts? _________________ 4

Working Capital Cycle _______________________________________________ 5

Accounts Payable Department-Description & Functions _____________________ 6

Need for separate A/P Department ___________________________________ 7

Objectives of AP Process ___________________________________________ 7

Step 1: Pre-Purchase Activities ______________________________________ 8

Step 2: Procurement/Sourcing Activities ______________________________ 10

Step 4: Payment Activities _________________________________________ 19

Finance Center of Excellence Page 2

Step 5: Post Payment Activities _____________________________________ 29

Monitoring of Accounts Payable ______________________________________ 31

Recommended metrics for tracking efficiency of AP Process ________________ 31

AP Business Metrics _______________________________________________ 32

Key Risk indicators in AP Process _____________________________________ 33

Self- Study Questions ______________________________________________ 34

Finance Center of Excellence Page 3

Why does Accounts Payable arise in the books of accounts?

Accounts Payable arises in the books of

Accrual Method of Accounting

Cash Method of Accounting

Finance Center of Excellence Page 4

Current assets- current liabilities is called net working

Working Capital Cycle

Finance Center of Excellence Page 5

Accounts Payable Department-Description & Functions

Finance Center of Excellence Page 6

Need for separate A/P Department

What is Accounts Payable (AP) process?

Finance Center of Excellence Page 7

These activities are described below in detail.

Step 1: Pre-Purchase Activities

a) Identification of material to be purchased

A company manufactures product X. It expects to manufacture & sell 20,000 units of X in

Finance Center of Excellence Page 8

b) Preparation of Requisition (Indent)

The indent consists of the following details:

Description of the Item/Service

Your company Logo Purchase Indent

Finance Center of Excellence Page 9

Step 2: Procurement/Sourcing Activities

Route 1. Calling for quotations for items to be purchased

Route 2. Placing the order with a predetermined vendor developed specially to

Route 1: Calling for Quotations

a) Receiving Material Requisitions/Indent

The approved indent is received by the procurement department based on which it

b) Check for necessary Approvals

c) Vendor Evaluation-Identify the suitable vendors

Once the material requisitions/indent is received by the procurement department

d) Request for Quotations (RFQs)

Once the list of prospective vendors is finalized, procurement department sends

Finance Center of Excellence Page 10

f) Selection of the Best Vendor

g) Supplier or Vendor Set-Up

Finance Center of Excellence Page 11

What is a Purchase Order (PO)?

What is a Work Order (WO)?

What information does the PO/WO contain?

Name & address of the company issuing purchase/work order

Name/Address of the supplier

Quantity ordered along with delivery schedule, if any