Invoice Processing Definition
Invoice processing is a method to handle and manage invoices from vendors or suppliers. When a company receives an invoice, it needs to verify that the details are correct, approve the payment, and then process it.
How Invoice Processing Works
Here’s a step-by-step guide to how the invoice process works as a part of the payable process:
- Receiving the Invoice: First, you get the vendor invoice. This can be a paper document, an email, or an electronic invoice in a digital format. This invoice lists what you’ve bought, how much it costs, and how and when the supplier expects to be paid.
- Reviewing the Invoice: Next, you examine the supplier invoice carefully. You check that the goods or services listed match what was actually delivered. You’re looking for any discrepancies in quantities, prices, or terms that don’t match your agreement or purchase order. This step is about ensuring everything is correct.
- Entering the Invoice Data into Your System: Once you’ve confirmed the invoice is accurate, you enter its details into your accounting software. This could be manual data entry or an automated invoice processing workflow if you use digital invoice systems. You’re making sure the expense is registered in your financial records.
- Invoice Approval: Depending on your company’s rules, the invoice will need approval from a manager or another department, especially if it’s for a significant amount. You’re seeking the green light that the expense is recognized and sanctioned.
- Scheduling Payment: After approval, you schedule the payment based on the payment terms (like net 30 days). You decide on the payment method, which could be a bank transfer, credit card, check, or online payment system. It’s your job to ensure the payment is prepared and sent on time to avoid late fees or strained relationships with suppliers.
- Invoice Payment: When the payment date arrives, you execute the payment. This step involves actually transferring the money from your account to the supplier’s, fulfilling your end of the purchase agreement.
- Archiving the Invoice: After payment, you store the invoice and all related documents (like purchase orders or approval emails) in your financial records. Invoice management is important for future reference, audits, and financial analysis. You’re keeping your financial house in order to ensure everything is documented and easily accessible.
Throughout the processing, the company is engaged in verifying, recording, approving, and fulfilling financial commitments. Effective invoice processing helps you manage cash flow and maintain good supplier relationships.
Who Handles Invoice Processing?
The accounts payable department or a designated staff member in your company handle payment processing. Depending on the size of a company, this could be a specific role or part of broader financial duties. The role involves receiving, reviewing, entering, approving, and paying an invoice accurately and on time to ensure that company finances are well-managed and suppliers are satisfied.
Invoice Processing Journal Entry
When you process an invoice, you make a journal entry in your accounting records.
Recording the Invoice: You debit the expense account or the asset account for the purchase, increasing its value, and credit the accounts payable account, increasing what you owe.
- Debit the Expense account (if it’s a service or consumable item) or the Asset account (if it’s a capital item) for the amount of the invoice.
- Credit Accounts Payable for the same amount, showing you owe this to the supplier.
Paying the Invoice: When you pay the invoice, you reverse the accounts payable entry with a debit and reduce your cash or bank balance with a credit.
- Debit Accounts Payable to decrease what you owe.
- Credit Cash or Bank account to decrease your cash or bank balance by the payment amount.
These entries keep your financial records accurate, reflecting the cost of purchases and the payment of liabilities.
Importance of Invoice Processing
- Cash Flow: Invoice processing is crucial for your business because it directly affects your cash flow. When you handle invoices efficiently, you ensure your suppliers get paid on time. Efficient invoice processing also means you’re accurately tracking your expenses, giving you a clear view of your financial position.
- Error Management: By keeping a tight handle on your invoice processing, you safeguard your business against fraud and errors. Accurate record-keeping makes it easier to spot discrepancies, duplicate payments, or fraudulent invoices, protecting your company’s finances.
- Budgeting and Planning: Effective invoice processing contributes to better budgeting and financial planning and analysis. When you know exactly what you owe and when it’s due, you can make informed decisions about spending and investments. It also streamlines financial audits and financial reporting, ensuring compliance with tax laws and regulations.
Invoice Processing and Accounts Receivable
When you sell goods or services, you issue invoices to your customers, and this is where accounts receivable comes into play. Unlike invoice processing, accounts receivable focuses on the money your customers owe you.
After you make a sale, you record an invoice as an accounts receivable, reflecting that a customer owes you money for the purchase they made.
Here’s how it works: you deliver a product or service and send an invoice to your customer. This invoice details what you provided, how much it costs, and when the payment is due. At this moment, you record the sale in your accounting system by debiting accounts receivable (increasing assets) and crediting a revenue account (increasing income). This entry shows that you expect to receive money in the future for the sale made.
When the customer pays the invoice, you then update your accounts. You debit cash or bank (increasing assets because you’ve received payment) and credit accounts receivable (decreasing assets because the customer’s debt is settled). This action reflects the cash inflow from the customer settling their invoice.
While invoice processing is about managing and paying the money you owe, accounts receivable is about tracking and collecting the money owed to you. Both processes are crucial for managing your business’s cash flow and ensuring financial stability.
Manual Invoice Processing vs. Automated Invoice Processing
Manual invoice processing involves you or your team handling invoices by hand. You receive, review, approve, and enter incoming invoices into your accounting system manually. Processing invoices manually can be time-consuming and prone to errors because it relies on human input. You have to sort through paper invoices, match them with purchase orders, enter data into a computer, and file everything for record-keeping. It’s a hands-on approach that can slow down payment times and increase the risk of mistakes, such as duplicate payments or a missed paper invoice.
You can automate invoice processing using automation software to streamline and manage the processing workflow automation. Once you set it up, the system can automatically capture invoice data, match the invoice to purchase orders, route them for the approval workflow, and even process payments. This reduces the time you spend on paperwork, cuts down on errors, and speeds up the entire payment cycle. Invoice processing automation also offers better visibility into your payables, allowing you to manage cash flow more effectively. With process automation, can track invoices in real-time, access reports quickly, and ensure compliance more easily.
Switching from manual to touchless invoice processing can save your time and money, reduce errors, and improve relationships with your suppliers by ensuring timely payments. While there’s an upfront cost to implement an automated system, the long-term benefits in efficiency, accuracy, and cost savings are significant.