Describe core accounts payable components
Accounts payable is money owed to suppliers presented as a liability on a company's balance sheet as short-term debt. For example, a restaurant might receive a shipment of food before the food is paid for. This debt is part of its trade payables.
Vendors
A company purchases goods and services from vendors. Each accounts payable transaction must be associated with a vendor. Use the Vendors page to create, maintain, and inquire about vendors.
Always enter as much data as possible when you set up a new vendor in Finance, because that data is used throughout the system for invoices, payments, and reports.
The base data automatically appears as the default for all transactions involving the vendor, but default information can always be changed if you need to override it.
To learn more about creating vendors, access the corresponding link in the Summary and resources unit at the end of this module.
Vendor invoices
To understand vendor invoices, you must first examine where they fit in with the business processes for Accounts payable, as presented in the following illustration:
When ordering a product or service from a vendor, you need to create purchase requisitions, enter purchase agreements, and enter purchase orders. Then, as a part of Accounts payable, you'll need to pay for the product or service. This involves receiving and entering invoices, generating and submitting vendor payments, and managing vendor settlements.
You can enter vendor invoices manually or receive them electronically through a data entity. When creating an invoice, you can also attach an electronic copy of the invoice to the record. After the invoices are entered or received, you can review and approve the invoices by using an invoice approval journal or the Vendor invoice page. You can use invoice matching, vendor invoice policies, and workflow to automate the review process so invoices that meet certain criteria are automatically approved, and the remaining invoices are flagged for review by an authorized user.
A vendor invoice from a purchase order is produced when products or services are received according to a purchase order placed with a vendor. The vendor invoice contains a header and one or more lines for items or services. A vendor invoice completes the cycle from purchase order to product receipt to vendor invoice.
Although some vendor invoices connect to a purchase order, vendor invoices can also contain lines that don't correspond to purchase order lines. You can also create vendor invoices that aren't associated with any purchase order. These vendor invoices might represent ongoing services, such as a utility bill. You don't have to reference a purchase order when you add an ongoing service.
You can enter a vendor invoice in several ways:
The vendor invoice register lets you quickly enter invoices that do not reference a purchase order so you can accrue the expense. It helps non-finance clerks easily enter vendor invoices for a finance person to post later. By using the vendor invoice approval journal, you can select those invoices and post them to the vendor balance to reverse the accrual.
In a single step, the vendor invoice journal lets you quickly enter invoices that don't reference a purchase order.
Together with the vendor invoice pool, the vendor invoice register lets you quickly enter invoices to accrue the expense. You can open the associated purchase orders later to post the invoice against the expense account.
The Open vendor invoices and Pending vendor invoices pages let you create vendor invoices from confirmed purchase orders.
Purchase order
A purchase order is a document that represents an agreement with a vendor to buy goods or services. The document also helps keep track of product receipts made toward the order and, later, the accounting of vendor invoices that the vendor bills toward the order.
The Purchase orders page contains an overview of the available orders and lets you modify those orders. When you open a purchase order, you can select the Header view, which contains information that is specified only one time for each purchase order, such as the vendor details. Alternatively, you can select the Lines view, where you can modify order lines. Typically, you'll switch between these two views as you modify purchase order. Charges aren't listed directly on the Purchase orders page, but they're accessed via menus on the order header and lines.
There are many reports where you can view information about purchase orders, product receipts, and vendor invoices. These reports are found in the Procurement and sourcing and Accounts payable modules.
The Purchase order preparation and Purchase order receipt and follow-up workspaces let you view lists of purchase orders in the various states that they have progressed to. They also provide a summary of the actions that must be taken. The Purchase order preparation workspace is focused on purchase order creation and review, order processing through approval, and confirmation with the vendor. The Purchase order receipt and follow-up workspace is focused on processing the receipt of goods or services against purchase orders. It includes lists that give insight into receipts that are overdue or that will soon be due for delivery by the supplier. These workspaces aren't used to perform the related receipt activities done in the warehouse. Those activities are performed by using pages in the Inventory management and Warehouse management modules. Processing vendor invoices should be done by using the Vendor invoice entry workspace, and payments should be done by using the Vendor payments workspace.
To learn more about the various stages a purchase order goes through, access the corresponding links in the Summary and resources unit at the end of this module.
Three-way matching policies
A “three-way match” refers to the three components (purchase order, receipt of goods, and supplier invoice) that must match within agreed-upon tolerance levels to ensure a proper and timely payment.
Let's examine a three-way matching example for item and vendor combination.
Summary: A controller at the corporate headquarters of a legal entity named Fabrikam decides that all invoices based on purchase orders should be matched with purchase order lines (two-way matching). The bookkeeper at the Malaysia division of Fabrikam can override the matching policy to a higher level of matching for specific purchase orders.
The volume and amounts are small, and there have been problems with delivery from some vendors in Malaysia. For these reasons, the bookkeeper sets the level of control for certain item and vendor combinations procured in Malaysia to three-way matching.
The invoice matching policies in this example help people in the following roles meet these goals:
The controller for the Fabrikam enterprise can help the people in their organization identify and correct problems with ordering, receiving, and paying for items (goods and services) from vendors.
The bookkeeper for the Malaysia division of Fabrikam can enforce corporate policy and make sure invoices are paid only after they're matched with purchase order lines and product receipts that represent the receipt of goods and services. The bookkeeper can also increase the level of control to three-way matching for specific items to control operational costs.
Prerequisites
The controller sets the matching policy at the legal entity level to Two-way matching.
The controller sets the Match price totals field for the legal entity to Percentage and enters 10% as the tolerance percentage.
The controller sets the unit price tolerance for all items to 2%.
The bookkeeper sets the matching policy at the item and vendor combination level for item PH2500 – Computer and vendor Contoso to Three-way matching.
A purchase order clerk at the Malaysia division of Fabrikam, issues purchase orders to Contoso to supply three items, as depicted in the following table. When they create the purchase order, they override the matching policy for the wireless mouse to be three-way matching instead of two-way matching.
| Item number | Quantity | Unit price | Net amount | Matching policy (default entry) | Matching policy (on the purchase order line) |
|---|---|---|---|---|---|
| PH2500 – Computer | 2 | 2,500.00 | 5,000.00 | Three-way matching | Three-way matching |
| MM01 – Wireless Mouse | 2 | 40.00 | 80.00 | Two-way matching | Three-way matching |
| USB Drive | 200 | 10.00 | 2,000.00 | Two-way matching | Two-way matching |
Scenario
The items arrive. A worker in the receiving department of the Malaysia division of Fabrikam is interrupted and doesn't post the product receipt immediately.
The accounts payable coordinator at Fabrikam enters and verifies the invoice submitted by Contoso. They verify the following information:
For items that require three-way matching, the quantity on the invoice line matches the quantity that was received. The received quantity is indicated on the product receipt that is matched to the invoice.
For items that require two-way or three-way matching, the prices on the invoice line are within the tolerances defined in the application. This includes the following types of price matching:
Net unit price matching – The net unit price on the invoice line matches the net unit price on the purchase order line, within the tolerance percentage. In this example, the net unit price tolerance is +2%.
Price totals matching – The net amount on the invoice line matches the net amount on the purchase order line, within the tolerance percentage, amount, or percentage and amount. In this example, the price totals matching tolerance is +10%.
The paper invoice from Contoso contains the following information:
| Item | Quantity | Unit price | Net amount |
|---|---|---|---|
| PH2500 – Computer | 2 | 2,500.00 | 5,000.00 |
| MM01 – Wireless Mouse | 2 | 41.00 | 82.00 |
| USB Drive | 200 | 10.05 | 2,010.00 |
| Total invoice | 7,092.00 |
The invoice line includes the following information.
| Item number | Quantity | Unit price | Line net amount | Matching policy | Product receipt quantity match | Price match | Price total match |
|---|---|---|---|---|---|---|---|
| PH2500 – Computer | 2 | 2,500.00 | 5,000.00 | Three-way matching | Failed | Passed | Passed |
| MM01 – Wireless Mouse | 2 | 41.00 | 82.00 | Three-way matching | Failed | Failed | Passed |
| USB Drive | 200 | 10.05 | 2010.00 | Two-way matching | Passed | Passed |
Note
For the PH2500 – Computer line, the Product receipt quantity match column has a warning icon, because the invoice line isn't matched to a product receipt. For the MM01 – Wireless Mouse line, the Product receipt quantity match column has a warning icon, because the invoice line isn't matched to a product receipt. The Unit price match column has a warning icon, because the 2% net unit price tolerance is exceeded. For the USB Drive line, the Product receipt quantity match column is blank, because two-way matching doesn't match invoice line and product receipt line quantities.
If approval is required for invoices to be posted with invoice matching discrepancies, the Approve posting with matching discrepancies toggle on the Invoice matching details page must be selected before the invoice can be posted with price matching errors and quantity matching errors. If approval isn't required, invoice processing can continue if there are no other posting errors.