Accounts Payable

BY – Pankaj Aggarwal
 ❖ Accounts payable is the amount owed by an
entity to its vendors/suppliers for the goods
and services received.
❖ Amount owed by a business for purchases
made on credit
❖ Accounts Payable is a liability due to a
creditor
❖ It Include purchase related to BAU, FA, Raw
Material, Services, Utility

❖ Accounts payable and its management is a critical business process through which
an entity manages its payable obligations effectively.
❖ As the accounts payable process is vital for every organization, a lot of time needs
to be invested for its successful implementation. In order to have efficient
accounts, payable process automation becomes necessary. This will minimize the
time and cost of invoice processing, employee headcount and much more
Characteristic of AP
• Timely - Major value of payable process is timely payment to vendor
/ supplier within due dates or payment terms

• Accuracy – Ensuring processing and payment is accurate as per the

invoice and terms

• Controls – Ensuring all process controls been check and verified

before invoice is ready for payments

• SOD / Approvals – Proper controls and segregation of duties is

exercised while invoices been processed and paid

• Processes – Best practice and processes been followed from

processing to payments
Inclusion In AP
• An invoice is a document given to the buyer by the seller to collect payment. It includes the
cost of the products purchased or services rendered to the buyer. Invoices can also serve as
legal records, if they contain the names of the seller and client, description and price of
goods or services, and the terms of payment.

• PO is a commercial document and first official offer issued by a buyer to a seller indicating
types, quantities, and agreed prices for products or services.

• GL, CC & WBS – GL represents the record-keeping system for a company's financial data
with debit and credit account records validated by a trial balance. The GL provides a record
of each financial transaction that takes place during the life of an operating company

• ERP – ERP stands for Enterprise Resource Planning and refers to software and systems used
to plan and manage all the core supply chain, manufacturing, services, financial and other
processes of an organization

• Bank – Banks act as payment agents by conducting current account for customers,
paying cheques drawn by customers in the bank, and collecting cheques deposited to
customers' current accounts. Banks also enable customer payments via other payment
methods such as Automated Clearing House (ACH), Wire transfers or telegraphic
transfer, EFTPOS and automated teller machines (ATMs).
Traditional Payable Process

Extensive Delayed
Lot of Paper
Labor Payments
Paperwork Approval
force
Current Payable Process
Futuristic Payable Process
Blue
Prisom

Automation
UI Path Anywhere

Leveraging AI & RPA most of the work will be done by Bots giving efficiency for 30% to 50% cost benefits. Bots to replace
human interventions
Departments Interrelated
Financial
Reporting Procurement

Travel & Project

Expense Finance

General
Treasury
Ledger
Purchase Order
 Types of Purchase Order
Standard Purchase Order - A standard purchase order
is typically used for irregular, infrequent or one-off
procurement. As mentioned above, it contains a
complete specification of the purchase, setting out the
price, quantity and timeframes for payment and
delivery.
A blanket purchase order involves a purchaser agreeing
to purchase goods or services from a specific vendor,
but not at any specific quantity. Pricing may or may not
be confirmed in a blanket purchase order. This type of
order is typically used for repetitive procurement of a
specific set of items from a supplier such as basic
materials and supplies.
A planned purchase order requires full details of the
goods and services to be purchased and their costs.
Dates for payment and delivery are also included in a
planned purchase order, but these are treated as
tentative dates. Issuing a release against the planned
purchase order places individual orders.
A contract purchase order sets out the vendor’s details
and potentially also payment and delivery terms. The
products to be purchased are not specified. A contract
purchase order is used to create an agreement and
terms of supply between a purchaser and vendor as
the basis for an ongoing commercial relationship. To
order a product, the purchaser may refer to the
contract purchase order when raising a standard
purchase order.
Types of Different PO / Invoice Match
The definition of invoice matching is the process of comparing information on the invoice with supporting
documents such as a purchase order, goods receipt, and contract. The invoice matching process aims to
ensure accurate vendor payments, correct accounting of costs and compliance to purchasing contracts as well
as to detect potential fraudulent invoices.

Invoice matching is used when a vendor invoice is preceded by a purchase order (PO) from the buying
organization. This means the buyer has created a purchase requisition stating the goods or services needed,
quantity, vendor and contracted price. Once the appropriate approvers within the organization have approved
the purchase requisition, a purchase order is generated and sent to the vendor. Upon delivery of the goods or
services, the buyer often needs to register a goods receipt in the ERP or procurement system.

❖ 2-way matching verifies that invoice information matches the corresponding purchase order

❖ 3-way matching verifies that invoice information matches both the purchase order and the goods receipt

❖ 4-way matching adds another criterion to verify that the invoice details also match the acceptance or
inspection document in the case this step is part of the purchasing process
Types of PO
Invoices
Invoice & Types
An invoice, bill or tab is a commercial document issued by a seller to a buyer, relating to a sale transaction
and indicating the products, quantities, and agreed prices for products or services the seller had provided
the buyer.
•Standard Invoice: This is the most common form of invoice that small businesses create, and the format is flexible enough to fit most
industries and billing cycles.

•Commercial Invoice: Commercial invoices include details of the sale that are needed to determine customs duties for cross-border sales.

•Timesheet: A timesheet is an invoice used when a business or employee is billing based on the hours they work and their standard rate
of pay. Timesheets are used by contract employees who are paid hourly by their employer

•Recurring Invoice: Recurring invoices are useful for businesses that charge clients the same amount periodically for their services.
Recurring invoices are common among IT businesses, who charge their clients the same amount each month for a package IT service.

•Pro-Forma Invoice: A pro forma invoice is an estimated invoice that a business sends to a client before providing their services. A pro
forma invoice provides the client with an estimated cost of the work to be completed.

•Debit Memo: A debit invoice, also called a debit memo, is issued by a business that needs to increase the amount a client owes to the
business. Debit invoices can be useful to small businesses and freelancers when they need to make a slight adjustment to an existing bill.
Journal Entries when VAT/GST/Tax is provided
NON-PO Invoices – With VAT NON-PO Invoices

❑ Expense A/c Dr. ❑ Expense A/c Dr.

VAT/GST A/c Dr. To Vendor A/c Cr.
To Vendor A/c Cr.

❑ Vendor A/c Dr.

❑ Vendor A/c Dr. To Bank A/c Cr.
To Bank A/c Cr.
PO Invoices – With VAT PO Invoices

❑ Expense A/c Dr. ❑ Expense A/c Dr.

To GR/IR A/c Cr. To GR/IR A/c Cr.

❑ GR/IR A/c Dr. ❑ GR/IR A/c Dr.

VAT/GST A/c Dr. To Vendor A/c Cr.
To Vendor A/c Cr.
❑ Vendor A/c Dr.
❑ Vendor A/c Dr. To Bank A/c Cr.
To Bank A/c Cr.
Journal Entries when VAT/GST/Tax is provided along with WHT/TDS

PO Invoices – AT Payment
NON-PO Invoices – AT Payment
❑ Expense A/c Dr.
❑ Expense A/c Dr. To GR/IR A/c Cr.
VAT/GST A/c Dr.
To Vendor A/c Cr. ❑ GR/IR A/c Dr.
VAT/GST A/c Dr.
❑ Vendor A/c Dr. To Vendor A/c Cr.
To Bank A/c Cr.
To WHT Tax A/c Cr. ❑ Vendor A/c Dr.
To Bank A/c Cr.
To WHT A/c Cr.
 • Goods receipt Note not completed in PO

• Purchase Order Not Approved / Released

• Price Variance

Reasons – • Quantity Variance

Unable to • Incorrect Vendor & Vendor not approved

• Incorrect Currency
Process PO
• Bank Details Mismatch
Invoices • Final Invoice not ticket for milestone invoices

• GR Based not checked in purchase order

• Vendor blocked for invoice posting

 • Incorrect Vendor & Vendor not approved

• Incorrect Currency

• Bank Details Mismatch

Reasons – • Vendor blocked for invoice posting

Unable to • GL/CC/ WBS/Project are closed or block for AP posting

Process Non • GL/CC/WBS/Project not open for manual posting

PO Invoices • GL/CC/WBS/Project are not relevant for Tax/VAT/GST

• GL/CC/WBS/Project are incorrect combination

• Approver not authorized for approving value of invoice

Controls – During Invoice Posting

VALID INVOICE AND BILLED TO ALL INVOICE ARE EITHER APPROVED DOA IS FOLLOWED FOR INVOICE
CORRECT ENTITY BY PO OR AUTHORIZED PERSON POSTING / AUDIT / PAYMENTS
THROUGH WORKFLOW OR MANUAL
Payments
 PAYMENT PROCESS
Business – Treasury to Reconcile
Perform Duplicate Review & maintain Bank Vs
Audit Check on Approve adequate funding Payment
Invoices Proposal in bank account GL

Create Proposal & Complete Payment Review

Send to Business for with 2-3 days forward Rejections
approval as transfer date & Reset
Payments
Payments Methods

• Cash
• Cheque
• Wire
• Host to Host
• Direct Debit
• Corporate Card
• Netting
Bank Involved in Payments

Org Disbursement Bank Vendor Beneficiary Bank

Intermediary Bank
Payment Rejections & Action
Level 1 Rejections
• Level 1 rejections are
Definition validation failure invoices
while performing payment
proposal
Action • Review all rejections and
Required make necessary changes in
documents or vendor
master database
• Incorrect Payment Method
Examples
Level 2 Rejections
• Level 2 rejections are
payment rejections
occurred once payment
file is transferred to bank
• Rest payments for all
rejections and make
necessary changes in
documents or vendor
master database or
document
• Incorrect Routing Code,
Incorrect Payment File
Format
Level 3 Rejections
• Level 3 rejections are
payment rejected after
been debited from
organization bank and
return is received after
few days/months
• Rest payments for all
rejections and make
necessary changes in
documents or vendor
master database or
document
• Beneficiary account
closed / Incorrect
Payment Data Requirements

❖ Bank Account Number ❖ Bank Account Number ❖ IBAN ❖ Bank Account Number
❖ ACH Routing Number ❖ Sort Code ❖ Swift Code ❖ Sort Code
Month End Close
Activities
Key Close Activities
External Vendors
❖ Maximum PO & Non-PO Invoice Posting
❖ Purchase order are corrected and approved
❖ Accrual are posted for unprocessed external vendor
invoices
❖ All Refund are allocated & Rejections are reset
❖ All corrections are performed
Intercompany Vendors
❖ All Intercompany PO & Non-PO Invoices are
booked
❖ Reconciliation is performed for Intercompany
suppliers
❖ Netting is performed between Intercompany
Vendors
❖ Reversal Accrual Entry is booked for
mismatch for Intercompany vendors
❖ All Payments are processed and completed
Journal Entries for Accruals

External Vendor Invoices in JL Module Intercompany Vendor Invoices in AP Module

❑ Expense A/c Dr. ❑ GIT/ Expense A/c Dr.

To Accrued Expense A/c Cr. To Intercompany Vendor A/c Cr.
MIS Reports
SLA’s – Service Level Agreement

• All Invoices received through lockbox/Email/Manual

2 days Scan are stamped and scanned within two business days
99%

• All Invoices received in Workflow/OCR system are

2 days OCR/Invoice Verification indexed/verified within two business days 98%

• All Invoices / documents are actioned within two

2 days Invoice Processing (Timelines) business days 98%

2 days Invoice Processing (Accuracy) • Invoices processed accurately 99%

2 days Invoice Audit Timelines • Invoices are Audited within 2 business days 99%

2 days Helpdesk • All queries are responded within 2 business days 98%

• All urgent payments are processed within same day

Same D Urgent Payment of request received before cut off 99%

Due D • All Payment batches are created within schedule 99%

Schedule Payment timeline
 • POT – Paid on Time
• Aged Creditor Trend Analysis
• Invoice Posted PO Penetration
• Invoice Posted Manually or EDI
• No of Reversals Processed
• No of Invoices Paid
• No of Invoices Paid by EFT, Wire, DD
• No of Invoices Processed Project Vs Non-Project Analysis

KPI – Key • FPY – First Pass Yield Trend Analysis

• Average days taken from Invoice Date to Payment Date

Process • Average days taken from Invoice receipt date to invoice posted date
• Payment Term Analysis Vs Vendor Category
• No of Payments Rejected
Indicator • No of Refunds Received
• No of reversal journals posted
• No of Invoices processed per FTE
• Average Cost per FTE
• No of queries received in helpdesk
• No of Down payment processed
• No of Refund Received
 • Open Purchase Order Report
• GR/IR Analysis Report
• Open Down Payment Report
• Open items report
• Cash Forecast
• Daily Production Report
• Dashboard Reporting
• Invoices on block Report
• FTE utilization report
• Inflow Analysis

Key Report •
•
Spend Analysis – Based on Expense A/c and Vendor Category
Predictive Analysis

• Tools Used for Automating Dashboards

• SPSS
• SQL
• PowerBI
• Tableau
Ratio Analysis
Key Ratio
Accounts Payable Turnover Ratio
The accounts payable turnover ratio is a short-term
liquidity measure used to quantify the rate at which a
company pays off its suppliers. Accounts payable
turnover shows how many times a company pays off its
accounts payable during a period.
TSP
AP Turnover Ratio = ( BAP + EAP ) / 2
AP = Accounts Payables
TSP = Total Purchases
BAP = Beginning Accounts Payables
EAP = Ending Accounts Payables
Days Payable Outstanding
Days payable outstanding (DPO) is a financial ratio that
indicates the average time (in days) that a company takes
to pay its bills and invoices to its trade creditors, which
may include suppliers, vendors, or financiers. The ratio is
typically calculated on a quarterly or annual basis and
indicates how well the company’s cash outflows are being
managed.
AP * No. of Days
Days Payable Outstanding = COGS
AP = Accounts Payables
COGS = Cost of Goods Sold
COGS Formula = Beginning Inventory + Purchase – Closing
Inventory
No of Days = Either 365 days, 90 days or 180 days
Or
DPO = No of Days / AP Turnover Ratio
Thank You