How invoices are processed varies from company to company. But whether you're processing and recording invoices manually or using invoice processing software and automation, some basic accounting principles are the same. Here are 5 common steps for processing invoices.
1. You receive the invoice
Invoices are received in a number of ways, including, but not limited to:
- As paper documents that are received in the mail
- As email attachments
- As electronic documents transmitted directly into financial software or document management systems
- As faxes
At this step in the process, it's critical that your business has a way to quickly and accurately capture the invoice and bring it into a system where it can be processed effectively. Attempting to process invoices from various sources via disparate processes (such as using one process for paper invoices and one process for electronic invoices) increases error rates and drives down efficiencies.
2. The invoice is recorded and put into the process
The data you record and how you do it depends on your own processes, but at minimum, you need to know:
- The amount owed
- Who is owed
- Payment terms
- Payment components such as the cost of goods sold, shipping, taxes and fees
- What the invoice is for (either in general or in detail)
- Any category codes required for your own books
One of the great benefits of supporting your invoice processes with document management is you don't have to record every single tiny detail from invoices. If accounts payable staff or anyone else has any questions, they can quickly access the invoice for additional information.
When processing invoices, organisations must first and foremost verify the accuracy of the information to avoid duplicate payments and fraud. Formal invoice verification involves the review of necessary and mandatory invoice data by the accounts payable department.
Taxes, fees and totals
Verification ensures the invoice amounts are correctly stated and calculated, including the correct tax rates, tax amounts and any other fees listed. The total amount and all other calculations are checked here as well, including entering the general ledger coding and the appropriate accounting period. In most cases, accounts payable also handles these tasks.
Order verification
Content verification determines whether the product being billed for was the one actually ordered and received. The number of items, quality and the agreed price are also checked at this point. These tasks are usually handled by colleagues in the accounts payable department, receiving department or purchasing.
Fraud detection
Finally, every invoice undergoes fraud examination. Validating whether the vendor is known and approved, ensuring that invoices haven't been sent more than once and checking to verify that individual line items don't appear on more than one invoice are part of the verification process.
If done manually, verification is expensive and time-consuming. To realise leaps forward in efficiency, companies should optimise invoice verification as part of their accounting activity whenever possible.
Once the accuracy of an invoice is verified, depending on your business rules, it may be approved and sent to be paid. If additional approval is necessary, the invoice should be routed to the appropriate approver.
3. The invoice is approved
Processes for invoice approval vary by company and invoice type. Some invoices can be automatically approved while others might require the signature of a department head or director.
Some common practices for invoice approval include sending the paper invoice or an associated form via internal mail to someone's physical inbox or doing the same thing via email. Neither of these approaches is especially productive; they both leave plenty of room for documents to get lost, people to drag their feet or misunderstandings to occur.
It's better to automate your approval processes as much as possible and keep approval workflows within your invoice processing system. That way, you can easily see where any invoice is in the process, how long someone has been sitting on an invoice and if someone is backed up with many invoices to approve.
4. Payment is processed
Once an invoice is approved, it can be put in line for payment. Typically, this simply means it's routed to a workflow so an accounts payable representative or other authorised employees can process payment.
To process payment, you typically need information such as:
- The total amount owed
- Who is owed, including name and address
- Any payment identifiers, such as accounts or invoice numbers, that should be included with the payment
- Types of payment accepted
Gone are the days when accounts payable staff simply processed a tidy stack of cheques to go along with a stack of approved invoices. Today, your team may need to process payments via paper check, electronic cheque, credit card or even online payment processing platforms such as PayPal.
5. Invoice and payment data are recorded and archived
Once payment is processed, final data can be captured and archived, as appropriate. General ledger entries for the payment debits and any other relevant accounting entries are made. With the right invoice processing software, such entries can be made with a few clicks of a mouse instead of numerous taps on the 10-key, further reducing opportunities for error.
Finally, invoice images and supporting documents, such as purchase orders, shipping manifests and account approvals, can be saved in a secure, searchable document repository. That ensures they're ready for easy retrieval as needed, including during audits.
