Accounts payable
- 2. 2 AGENDA Overview of AP process Objectives of P2P process & cycle Inputs for P2P process Stages of P2P process • Purchase requisition • Vendor management • Purchase order • Invoice • Payment Outputs of P2P process P2P sub process P2P Accounting
- 3. OVERVIEW OF AP PROCESS
- 4. 4 WHAT IS PROCURE TO PAY? Procure to Pay (P2P) - Definition Procure to pay (purchase to pay or P2P) is the process of obtaining and managing the raw materials needed for manufacturing a product or providing a service. It involves the transactional flow of data that is sent to a supplier as well as the data that surrounds the fulfillment of the actual order and payment for the product or service.
- 5. 5 PURCHASE ACTIVITIES IN AN ORGANIZATION Purchaser Identify vendors Negotiate commercials Build vendor relationships Place orders Consumer Daily operations/business continuity Quality of the product/service In time delivery Price/budget considerations (value for money) Accounts Payable Manage working capital of the business: Maintain Vendor database Preventing frauds Reconciliation of vendor accounts Manage vendor helpdesk
- 6. 6 PROCUREMENT Functions and activities Purchaser Mapping out material requirements with sources and resources Vendor Management Evaluating and selecting vendors as well as reviewing vendor performance periodically Purchase Order Monitoring inventory and requirements. Contacting vendors and ordering the goods/ services Goods Received Note Receiving materials and storing them and issuing receiving note Invoice Processing & Payables Receiving invoices and accounting for payables
- 7. 7 Purchasing Invoicing Vendor Performance IT Supports Vendor Masters PROCUREMENT Performance Indicators No./ Value of open orders PO Vs Non-PO Purchase Preferred Vs Non Preferred purchase Spend over Budgets Savings over 1st Quotes Savings over previous year Cycle time – PR to PO No. of Invoices paid on time % Discount availed Debit balances > X period Credit balances > X period Cycle time – invoice processing # of accurate recording/ payment # of duplicate payments # of debit/ credit notes (& reasons) No/ Value of Goods received not invoiced Key SLAs agreed with vendors Improvement % in X period over Y period # of vendor complaints System response System downtime % New vendors added % vendors deactivated # vendors blacklisted
- 8. 8 PROCESS DOCUMENTS Procurement Planning Procurement Plan Variance Report Procurement Budget Vendor Management Vendor Setup Form Vendor Performance Requisitioning & Purchasing Bids Evaluation Summary Purchase Order Authority Matrix Purchase Requisition RFQ Vendor Quotes Receiving & Warehousing Goods Receipt Note Quality Control Check Bin Cards Inventory Ledger Invoice Processing & Payables Invoice • Authorized Signatory Bids Evaluation Summary Purchase Order Authority Hierarchy Purchase Requisition Request for Quote (RFQ) Vendor Quotes Payments report
- 9. OBJECTIVES OF P2P PROCESS & CYCLE
- 10. 10 OBJECTIVE OF P2P PROCESS PLANNING Efficient planning to avoid production stoppages PURCHASE CONTROLS Receipt of materials as per purchase orders raised TIME MANAGEMENT Ensure timely and adequate availability of the required product type to facilitate timely production PRODUCTION CONTROLS Production should meet demand Ensure availability of desired quality of materials at the right price VENDOR SELECTION & MANAGEMENT Efficient tracking of vendor evaluation Approved vendor listing / master files are accurately maintained, and changes to this listing are done only with proper approvals
- 11. 11 OBJECTIVE OF P2P PROCESS INVENTORY MANAGEMENT Optimise inventory holding levels Monitor the status of pending purchase orders and initiate required actions WAREHOUSE MANAGEMENT Enable efficient receipt, identification, storage and handling of material Acceptance of material as per Company quality standards ACCOUNTING PROCESS CONTROLS Accurate and timely recording of quantities received and accepted Amounts for goods or services received are recorded in the appropriate period PAYMENT PROCESSING Timely payment to vendors
- 12. INPUTS FOR P2P PROCESS
- 13. 13 INPUTS FOR P2P PROCESS Vendor Selection and Evaluation Market Research Materials Verification Report Quotation / Justification Note Vendor Masters Vendor Master Creation Format Vendor Evaluation Form, E Payment Form and Supporting Documents Purchase requisitions Manufacturing Planning Report (MPR) Daily Manufacturing Report (DMR) Bill of material Daily Stock Statement Purchase Orders Price Revision Note Procurement Plan
- 14. 14 INPUTS FOR P2P PROCESS Material Receipts Consignment Documents (including supplier invoice) Weighing Slip Quality Inspection Sample Materials Inspection Report Goods Rejection GRN Goods Rejection Report Invoice Verification Invoice VAT Accounting Invoice Purchase Register in ERP
- 15. 15 INPUTS FOR P2P PROCESS Debit Notes / Credit notes Debit note / credit notes from vendor Valuation of RM PM All GRN and material movements CENVAT Accounting GRN Goods returned / transferred Bill of entry CENVAT Credit Details Advances to Vendors Board Note Request from vendor / proforma invoice
- 16. 16 INPUTS FOR P2P PROCESS Vendor Balance Confirmation Statement from vendor Write Offs, Scrapings, Degradation, Obsolescence, Spoilage Material at D&D location Period End Processes Material rejections Wheat dispatches Vendor confirmations Physical verification Bulk Approved vendors Balance confirmation from warehouse
- 17. 17 INPUTS FOR P2P PROCESS Period End Processes (contd…) Hedging Transactions Advances to vendors GRIR account CENVAT clearing account Debit notes / Credit notes Confirmation from third parties Write off / degradation
- 18. STAGES OF P2P PROCESS
- 19. 19 PROCURE TO PAY CYCLE Request for procure Vendor selection Raising order Receiving of Goods Receiving of invoice Payment
- 20. 20 PROCUREMENT PLANNING Process Flow Sales Plan Sales Materials Procurement Plan Materials Revised Procurement Plan Variance Report Production Plan/ Maintenance Plan Production Approved Procurement Plan Procurement Budget Lead Times Historical Consumption Levels Current Inventory Levels
- 22. 22 REALIZING THE REQUIREMENT The user department raises a document called the purchase requisition when the need to purchase arises The requisition document gives details of what the purchase requirement is, date on which it is required and any other specifications such as quality/brand Purchase requirement in the user department The purchase requirement is sent to the purchase department
- 23. 23 APPROVAL OF PURCHASE REQUISITION Purchase requisition is sent to the manager of requestor for approval Manager reviews the requisition and approves it after being satisfied with the reason for request for goods and services Approved requisition get sent to sourcing team for sourcing of the vendor and PO Creation
- 24. 24 REALISING THE REQUIREMENT Quantity of the order determined on various factors: Stock levels( Minimum, maximum, reorder levels) Lead time for vendor to deliver material to plants etc. Lot size Product price Budget etc.
- 25. 25 PURCHASE REQUISITIONING Process Flow Map Current Inventory Levels Material Requirement Planning Department Approved PR Procurement Purchase Requisition
- 27. 27 PROCURE TO PAY CYCLE Request for procure Vendor selection Raising order Receiving of Goods Receiving of invoice Payment
- 28. 28 VENDOR SELECTION The purchase department, on receiving the requisition decides on the vendor on whom the order is to be placed To select the vendor, companies: • Perform market research and prepare list of prospective vendors and submit via email to Manager Procurement for review • Conduct background information of the vendors like financial stability, any litigation is faced in the past etc. • Obtaining quotations from various vendors and placing the order with the best vendor based on price/delivery
- 29. 29 VENDOR SELECTION AND EVALUATION Process Flow Procurement Plan Vendors Procurement Committee Approved Vendor Vendor Performance Evaluation Advertisements Vendor Response Vendor Set up Form
- 30. 30 APPROVED VENDOR VS. NEW VENDOR If the order is placed with an approved vendor, the information related to that particular vendor exists in the system In case, the order is to be placed with a new vendor, it is to be ensured that vendor is setup in the system
- 31. 31 VENDOR MASTER DATA It refers to the list of the vendors with their details with whom entity procures goods or services All vendor gets added to the Vendor master data before any transaction is done Adding vendor on list saves time of procurement department
- 32. 32 VENDOR MASTER DATA Details Bank Account details Payment Terms Payment Methods Remittance details Vendor Name Address Products they sell Others like vat no. etc
- 33. 33 VENDOR MASTER MAINTENANCE Process Flow Map Authorized signatory Vendor master in-charge Purchasing Officer Vendor Set Up Form Audit Trail
- 34. PURCHASE ORDER
- 35. 35 VENDOR MASTER MAINTENANCE Process Flow Map Request for procure Vendor selection Raising order Receiving of Goods Receiving of invoice Payment
- 36. 36 RAISING ORDER TO SUPPLIER The purchase department after receiving the approved requisition raises a purchase order (PO) on the vendor from whom the purchases are to be sourced from The PO forms the contract which is a legal agreement when there is no formal agreement in place Each POs has its own unique number
- 37. 37 PURCHASE ORDER The critical information on a purchase order is: Unit Price and Quantity ordered Description of goods/services Terms of payment Invoicing address Delivery schedule Contact details (Accounts payable and requestor) Critical information
- 38. 38 TYPES OF PURCHASE ORDERS Standard Purchase Orders Standard purchase orders for one-time purchase of various items. It is created when the details of the goods or services you require, estimated costs, quantities, delivery schedules is known Blanket Purchase Agreements Blanket purchase agreements is prepared when detail of the goods or services you plan to buy from a specific supplier in a period is known, but delivery schedule is not known Limit Purchase Order Limit purchase order is prepared where the spending limit is know for a specific vendor or product
- 39. 39 PURCHASE ORDER Process Flow Map ProcurementPurchase Requisition Vendors Bid Evaluation Summary Issue Purchase Order Procurement Committee
- 40. 40 IMPORTANCE OF PURCHASE ORDERS Purchase order is one of the most critical document in order to get an invoice paid Purchase orders help to plan and control the business spends PO based purchases also helps entity to take advantage of negotiated rates and economies of scales PO is used as a base document in case of any dispute with a vendor in future
- 42. 42 PROCURE TO PAY CYCLE Request for procure Vendor selection Raising order Receiving of Goods Receiving of invoice Payment
- 43. 43 RECEIVING OF GOODS After receiving the order, the purchases will be sent by the vendor to the to address stated on the purchase order. The purchase is received by the requestor. The requestor will check the purchase to ensure: • Delivery is according to the purchase order • Quality of purchase is in line as per expectation • Quantity is as per the purchase order If the purchase is defective, it will be sent back to the supplier
- 44. 44 GOODS RECEIPT NOTE (GRN) The requestor after verifying the purchase will acknowledge the receipt of goods by creating a document called the Goods Received Note This document gives evidence that the purchase has been received from the vendor and the requestor is satisfied with the delivery of purchase The GRN contains no reference of the pricing details this is because the pricing details contain in supplier’s invoice Accounts payable department refers the GRN while processing the vendor’s invoice for payment
- 45. 45 GOODS RECEIVING AND RECORDING Process Flow Map Goods Receipt Note Inventory Ledger Quality CheckBin Card Warehouse
- 46. 46 IMPORTANCE OF GRN An invoice received from vendor cannot be paid without GRN of the purchase order (three way match) GRN confirms the approval of invoice to accounts payable to make the payment Timely GRN facilitates timely payment of invoices to suppliers If not performed, It increases the out standing invoices and impacts aged creditors
- 47. INVOICE
- 48. 48 PROCURE TO PAY CYCLE Request for procure Vendor selection Raising order Receiving of Goods Receiving of invoice Payment
- 49. 49 RECEIVING OF INVOICE In order to obtain the payment a vendor must send an invoice for the purchases supplied The invoice is a request for payment and is normally sent to a company’s finance department A vendor invoice should contain the following details: • Company name, address and registration number • Unit price, quantity of the purchase supplied • Payment terms and purchase order number • Gross amount, net amount • Taxes (if any)
- 50. 50 INVOICE PROCESSING Finance department review the vendor’s invoice to ensure it is fit for purpose The invoice is registered to AP ledger to register the financial liability Once approved, the invoice can than be paid on its due date according to the payment terms
- 51. 51 INVOICE PROCESSING AND PAYMENT Process Flow Map Goods Receipt Note Procurement Officer Vendors Stores InvoicePurchase Order Accounts Payable Officer Accounts Payable Manager
- 52. 52 INVOICE PROCESSING AND PAYMENT Process Flow Map Payment Processing Officer Payment Processing OfficerPayment Manager Cheque signatory Purchase Accounting Balance Confirmation Vendors
- 53. 53 INVOICE APPROVAL All invoices must be approved in order to enable payment An invoice needs to go through the process of two way or three way match before vendor can be paid for it
- 54. 54 TWO WAY MATCH In two way match the invoice value is matched with the purchase order value If all the items match, the invoice is approved for payment
- 55. 55 THREE WAY MATCHING In three way match the vendor invoice will be matched with the purchase order and actual delivery of purchases (GRN) If all the above items match, the invoice is recorded GOODS RECEIVED NOTE
- 56. 56 TAX ACCOUNTING While recording invoice in the system, tax amount should be recorded correctly. This enable entity to: Accurate and timely filing of VAT, sales tax returns etc. Recording of accurate input VAT which needs to be claimed later Apply correct rates while selling the products to their customers
- 57. PAYMENT
- 58. 58 VENDOR MASTER MAINTENANCE Process Flow Map Request for procure Vendor selection Raising order Receiving of Goods Receiving of invoice Payment
- 59. 59 PAYMENT Once an invoice is approved it will be paid to vendor on due date All the payments are done by the treasury team of the company Vendor will be notified for the payment made by sending a notification of payment, generally called a remittance advice
- 60. 60 IMPACT OF P2P Payment Capital Nature Increase in Assets (New Assets) Increase in Liabilities (Loans) Decrease in Assets (Bank/ Cash) Revenue Nature Increase in Expenses (purchase of goods) Increase in Liabilities (Creditors) Decrease in Assets (Bank/ Cash)
- 61. P2P-SUBPROCESS
- 62. 62 VENDOR RECONCILIATION This is the last step in the P2P cycle whereby the customer checks the payable account in their books with the payment received. Any discrepancies found are mutually sorted out It is a procedure to ensure that the vendor’s balance in our ledgers agrees with their books Statement from Vendor Vendor accountReconcile
- 63. 63 VENDOR STATEMENT RECONCILIATION Vendor Reconciliation : It is the process of identifying the missing invoices from our system compared to supplier’s statement and than work upon these items in order to have the equal balances Purpose of the reconciliation is to update the status of all outstanding Invoices
- 64. 64 ACCOUNTS PAYABLE HELPDESK It is the responsibility of the organization to ensure timely and correct payment to be given to the vendor for their invoices Vendors and Business may have certain queries related to invoice If vendors have any queries related to invoices they can contact the AP helpdesk via email or telephone
- 65. 65 ACCOUNTS PAYABLE HELPDESK Majority of queries received at accounts payable helpdesk are from vendors/business. Vendors/business generally contact accounts payable helpdesk for: Chasing Payments for invoices Chasing Remittance Advice for the payment received Incorrect Payment Request for Early/On-off Payments PO Based Queries Trip / Petty Cash/ Workflow
- 66. 66 CREDIT NOTE Credit note Definition: Credit note is a document issued by vendors to entity to correct the invoicing errors or to offset the excess payments made to them. It is an acknowledgement of reduction of liability due to return of goods, non-acceptance of goods, excess payment for the goods It allows to recover money from supplier for incorrect delivery or over payments
- 67. 67 INTERNAL CONTROL RISK Risk that the business may incur losses due to its own employees responsible for certain function may misuse their position to defraud the business This is mitigated by: Implementing segregation of duties Implementing limits on managerial sanctioning power (e.g. a manager can authorize a payment of up to $15,000. Amounts higher than that will require the approval of Director)
- 68. OUTPUTS OF P2P PROCESS
- 69. 69 OUTPUTS OF P2P PROCESS Vendor Selection and Evaluation List of Potential Vendors Quality Test Report Approval Note DMC note for approval of vendor Approved Vendor List Vendor Master Vendor Code Purchase Requisition Procurement Plan Purchase Orders Purchase Info Record Purchase Order
- 70. 70 OUTPUTS OF P2P PROCESS Material Receipts Gate Register Purchase Register GRN Quality Inspection Quality Clearance Note / Rejection Note Goods Rejection Quality Clearance Note / Rejection Note GRN Reversal Invoice Verification Bill Register VAT Accounting VAT Statement VAT Returns Form C / Form F
- 71. 71 OUTPUTS OF P2P PROCESS Debit Notes / Credit Notes Debit Note Credit Note CENVAT Credit Reconciliation between excise records and ERP Advances to Vendors Approved Board Note Schedule of overdue advances Write Offs, Scrapings, Degradation, Obsolescence, Spoilage Board Note Updated Inventory Valuation
- 72. 72 OUTPUTS OF P2P PROCESS Period End Processes Approved material dispatch-receipt reconciliation Vendor Accounts ageing Report Material Rejection Report Reconciliation of vendor confirmations Physical verification differences report Approval note for bulk purchases Approved vendor list Balance confirmation from auxiliary warehouse Ratification for Spot Buy Reviewed list of open PO Reconciliation of hedging transaction and rate contracts in foreign currency Reviewed list of open GRIR account
- 73. 73 OUTPUTS OF P2P PROCESS Period End Processes (contd…) Matched CENVAT clearing account Unplanned cost schedule Approved list of completeness of debit notes / credit notes review Variance report- Write off / degradation report Report for on-line tracking of C forms / F forms issued
- 74. P2P- ACCOUNTING
- 75. 75 P2P MOVING FROM PROCESS TO ACCOUNTING P2P accounting is a part of the overall accounting process The outcome of the Accounts Payable process is that the purchases are recorded and a corresponding liability is created
- 76. 76 ACCOUNTING ENTRIES FOR PO INVOICES When GRN is done on the purchase order When Invoice is Booked on the purchase order When Payment is Made to the vendor Particulars Amt Amt Expense A/c Dr. To GR/IR A/c Cr. xxxx xxxx Particulars Amt Amt GR/IR A/c Dr. VAT A/c Dr. To Vendor/c Cr. xxxx xxxx xxxx Particulars Amt Amt Vendor A/c Dr. To Bank A/c Cr. xxxx xxxx
- 77. 77 ACCOUNTING ENTRIES FOR PO INVOICES When Invoice is approved When Payment is Made to the vendor Particulars Amt Amt Expense A/c Dr. To Vendor A/c Cr. xxxx xxxx Particulars Amt Amt Vendor A/c Dr. To Bank A/c Cr. xxxx xxxx
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