Procure to Pay

UNIT 5 INVOICE PROCESSING

Structure
5.0 Objectives
5.1 Introduction
5.2 Accounts Payable - Team Structure
5.3 Types of Invoices
5.4 Invoice Processing
5.4.1 Purchase Order based Invoices
5.4.2 Non-Purchase Order based Invoices
5.4.3 Quality Performance Measurement

5.5 Credit Note Processing

5.6 Return of Invoices
5.7 Vendor Account Reconciliation
5.8 Let Us Sum Up
5.9 Key Words
5.10 Answers to Check Your Progress
5.11 Terminal questions

5.0 OBJECTIVES
The objectives for this unit are to familiarize the learners with:
x types of invoices;
x invoices processing;
x credit notes processing;
x vendor account reconciliation;
x significance of invoice processing and vendor reconciliation to the P2P cycle;
and
x other activities associated with the invoice clearing process.

5.1 INTRODUCTION
In the preceding units, we understood the overall Procure to pay (P2P) process at
a high level. We also learnt how new vendors are set up in the vendor master. In
this unit, we will look at how invoices and credit notes are processed. We will
also learn the process of vendor accounts reconciliation.
Invoice processing is the most important activity in the whole P2P cycle. It needs
to be done accurately and quickly; otherwise it can lead to vendor dissatisfaction
and subsequently the buyer’s (client’s) business suffering a loss of reputation and
44 may delay in receipt of goods or services for future requirement.
Let us take a look at the overall P2P process, as shown in Fig 5.1. (Invoice Invoice Processing
processing is highlighted as this is the topic of discussion now)

1- Generate purchase request

Procurement
User Dept.
Dept.
2- Select vendor
3- Set up vendor
4- Raise purchase order

5- Vendor makes
Stores Dept. delivery Vendor

6- Stores confirms delivery

AP Dept.
7- Vendor sends invoice

8 - Invoice is processed for payment

Fig 5.1: Overview of P2P process

5.2 ACCOUNTS PAYABLE - TEAM STRUCTURE

We have discussed the vendor setup in the previous units. In this unit we will
learn the process of invoice / credit notes processing and also will know the process
around vendor accounts reconciliation.
As discussed in an earlier unit (Unit 3), an invoice is a document that provides the
details of the goods/services provided, prices charged for the goods/services, the
total amount payable. It is a document requesting for the payment against the
goods/services provided.
AP Operations
Manager

Invoice Vendor Vendor

Payments Helpdesk Quality Control
Processing Reconcillation Maintenance
Team Team Team
Team Team Team

Fig. 5.2: Structure of the AP team 45

Procure to Pay In large organisations, the volume of invoices received can vary from about 10,000
to 50,000 invoices per month. Ensuring that all the invoices are paid on time
requires a dedicated and specialized team. This team is called the ‘Accounts
Payable’ or AP team. It consists of invoice processing team, vendor reconciliation
team, payments team, vendor helpdesk team, vendor maintenance and quality
control teams.
As shown in the figure above, these teams report to the AP manager. For the
purposes of financial controls, invoice processing team and vendor set up team &
payments team should be kept separate from each other. There should be no person
who is a member of more than one of these teams. This helps to prevent fraudulent
payments.
In this unit we will discuss about the functioning of invoice processing team and
vendor reconciliation team. The other teams are discussed later.

) The performance of the AP team is measured by:

• how quickly it can process and clear invoices for payment,
• how accurately it can process and clear invoices for payment,
• how many invoices have been paid in a timely manner,
• how effectively it pursues the clarifications from the client and closes
issues that can hold up the payments on the invoices,

5.3 TYPES OF INVOICES

Let us now discuss the various types of invoices and then how they are handled
for payments.
Primarily invoices are classified as PO and non-PO invoices. PO based invoices
are those which are raised against a PO. The invoice contains reference information
regarding the PO number. Non-PO invoices are raised by the vendor for purchases
that were made without raising a PO.

) Recap -The purpose of using POs: Purchase orders are created for 2
primary reasons:
a) The client organization clearly sets out its requirements to the vendor
in terms of the items required, the quantity and rate of each item and
other delivery terms. Since the vendor agrees to these terms, it
constitutes an agreement between the two parties. This avoids
confusion at the time of delivery.
b) Since the PO needs the approval of the authorized employee(s) before
it is sent out, the process ensures prevents unauthorized purchases
by employees.

There are advantages and disadvantages in using a PO to make purchases. The

benefits are mentioned above. The disadvantages of using POs are that it can be
quite complicated for simple low value purchases. Also PO invoices will not be
issued for some categories of expenses like taxes or utility and telephone bills.
46
There are 2 modes for a vendor to send an invoice to the client organization. Invoice Processing

1. Paper invoices
2. Electronic invoices
The paper invoices are printed on papers out of the invoicing systems of the
vendor and sent to the buyer (client) using the traditional mail facility. Processing
of these invoices takes longer time and involves manual data entry of the invoice
into the client’s ERP.
The electronic invoices are received through electronic channels (like computer
networks, internet. etc.) and not on paper. The invoice data enters into the client’s
computers directly and the invoice is processed automatically for payment. The
electronic invoices can be broadly classified into the following types:
a. EDI (Electronic Data Interchange)
b. Supplier portal
EDI invoices: The National Automated Clearing House Association, USA defines
EDI as “the application-to-application exchange of business information in a
standard format”. In simple terms, EDI is a standardized electronic format for 2
companies to exchange commercial information.

Invoices sent to
customer electronically
through EDI

AP Dept.
Vendor

AP Dept. electronically
matches invoice with
electronic PO and GRN
using EDI standards

Post matching, the vendor is

paid by cheque or electronic
funds transfer

Fig 5.3: EDI applied in the AP process

EDI technology has a strong application in the AP process. In this method, the
supplier submits the invoices in electronic files (adhering to the EDI standards)
which are transmitted to the client using an EDI network (as shown in Fig.5.3).
Once the invoices are received by the buyer, they are automatically loaded into
the AP systems and processed for payment. It is compared with the other data
from the purchase order and matching takes place accordingly. Once it goes
through, the invoice is processed for payment.
The benefits of this technology are realised for suppliers who send large volumes
of invoices as they can be processed automatically without any manual intervention.
Companies and industries like automobile, manufacturing, retail, etc. deal with a
47
Procure to Pay large number of suppliers and get thousands of invoices each day. They usually
insist that their vendors (especially the large ones) use EDI to send their invoices.
The challenges in using EDI is primarily around high initial costs involve for EDI
platform.
Supplier Portal invoices: Some large clients with complex procurement function
have automated the invoice handling process by creating secure internet websites
especially developed for this purpose. These websites are called supplier or vendor
portals and they help to streamline coordination with their vendors and automate
activities. (See figure 5.4)

Vendor submits invoice through

portal Vendor aheads status of
his pending payments

Client
Company’s
Supplier Portal
Vendor
Client

Client Procurement team sneds

PO to vendor Client AP team
updates status of invoices

Fig 5.4: Company’s Supplier Portal

Here are some of the activities for which the portal can be used:
x The company can send the purchase order to the vendor using the portal.
x Vendors can confirm their agreement to the purchase order.
x The vendors can submit electronic invoices to the company.
x The vendors can update the status when the goods are shipped to the buyer.
x Vendors can track the status of the payments for their invoices.
These websites use secure technology to make sure that the transaction are made
by the actual parties and avoid frauds or impersonation.
Once the invoice has been received electronically by the company, the rest of the
processing (including invoice matching and payment) happens automatically.
This is not very widely used because the client is usually selective about enabling
only large vendors through this channel.
48
) Some other types of invoices Invoice Processing

a) Consolidated invoice: This is used when there are multiple buyers

or user of a service within the client organization. Normally, each
user would get a separate invoice for their charges. Using a
consolidated invoice, the vendor can submit one invoice for all the
users. The AP team makes a single payment and charges the cost to
the multiple cost centres in the company.
Example: A telecom carrier provides cell phone connections to a
large corporation. Each employee of the corporation who has been
allotted a company provided cellular phone will incur monthly usage
charges on it. As a result, each month the telecom carrier sends
hundreds of invoices to the company and each of these needs to be
processed separately.
A better alternative would be that the carrier presents one single
consolidated invoice to the corporation for processing. Along with
the consolidate invoice, it presents a statement which contains
kemised details for each connection. Based on this statement, the
invoice can be processed and the charges can be booked into the
budgets of respective departments. This helps to reduce the number
of invoices that need to be processed.
b) Evaluated Receipt System: Evaluated Receipt Settlement (or auto-
payment) is a method that removes the necessity for a vendor’s
invoice. It is most commonly seen in the manufacturing sector
between long standing customer-vendor partnerships.
A supplier and its customer enter into an agreement to use evaluated
receipts settlement. The customer is given the latest catalogue of
products with their rates. The customer procurement team raises POs
based on their requirements and sends these over to the vendor. Based
on the PO, the vendor issues an advanced shipping notice (ASN) to
the customer, which confirms the receipt of PO and gives the details
of the shipment of goods. It is sent electronically. Thereafter, the
vendor ships the goods. The customer receives the shipment,
confirms it against the purchase order, verifies the items and quantity
and pays the supplier.
It was pioneered by General Motors in 1994 and helps the parties
involved by preventing any mismatches between the PO and invoice,
eliminates work like scanning, indexing & reconciliation.
c) Optical Character Reader (OCR invoice): Optical Character
Reader is a scanner which can scan the characters appearing from a
specific location on the paper and place them into the relevant field
within the system (e.g. ERP). Under normal scanning the invoice
will get stored as an image. However, using an optical character, the
relevant information from the invoice will get stored as a character
into the relevant field within the system (e.g. ERP). This is useful
because the OCR can be programmed to look for certain data in a
particular place. This also helps to automate invoice processing by
avoiding manual data entry.
49
Procure to Pay These invoices, discussed above, can also be classified as PO based (invoices
raised for the goods and services supplied against a purchase order) and non-PO
based invoices (raised for the goods and services supplied without a purchase
order).
The processing of PO and non-PO invoices is different as discussed below.

5.4 INVOICE PROCESSING

Invoice Processing is the most widely outsourced process to a third party service
provider operating from a remote location. This is made possible by scanning
tools, document management tools, workflow tools and ERP systems. The paper
invoices are usually received in the client’s location (any part of the globe e.g. US
/ Europe / Australia). In some cases it may be received at the outsourcing partner’s
location. The scanning operation happens at the same location where the invoices
are received. The rest of the operations can be carried out from a remote location
like India.

Start 1- Vendor sends the invoice to the company by mail. The

Vendor mailroom receives it and sends it for scanning Scanning centre

2- The scanned invoices are

indexed and entered into the
AP workflow tool

End 5- Payment for invoice is sent to the vendor

3- z Invoices with PO go for PDWFKLQJ (2 way/3 way)

z Non-PO invoices are sent for approval to authorized approver in User Dept.
z Invoices that are not successfully matched to the User Dept. for resolution

AP Dept.

User Dept.

4- z Authorized approver approves invoices in the workflow, or

z Authorized approver resolves any invoices that have been put on hold

Fig. 5.5: Accounts Payable cycle

The figure 5.5 above shows how the accounts payable process is managed from a
remote location. The outsourcing team operates from this remote location.
1. The vendor sends the invoice to the company. The client gives all vendors a
specific address to send their invoices. This is usually the address of the mail
room and scanning centre.
2. The initial handling of the invoice at the mailroom consists of the following
steps:
a. Scanning: The scanning operation converts the paper documents into
digital images which are stored on computers and can be accessed over
a computer network from anywhere in the world.
b. Indexing: For further processing, the scanned images of the invoices
are indexed based on some key information e.g. invoice number, vendor
code/name, invoice date, invoice amount etc. so they can be easily queried
50 and accessed by the AP team. Indexing enables easy classification and
 search by the AP team later. It usually happens from the remote location. Invoice Processing
Indexed invoices are sorted first in invoice or credit note, PO / Non PO,
compliant invoices and non compliant invoices. Compliant invoices are
those invoices where all the required information to process an invoice
is available and in non compliant invoices some of the required
information to process are either missing or not adequate e.g. PO number,
PO not authorized etc.
c. Validation: The invoice is initially validated for the following:
• Whether the same invoice is processed in the past i.e. if the invoice
is a duplicate.
• Whether it is an invoice or a credit note (credit note is received along
with invoices but needs a different treatment).
• Whether all the data required to be entered into the system against
the invoice is available. (Vendor’s name, PO no., invoice no., invoice
amount, payment date, cost/account codes etc.)
If the invoice is identified as duplicate it is not processed further because
it may result in duplicate payments. If the invoice turns out to be a
credit note, it is processed by the invoice team albeit differently (this
has been discussed later in this unit). In case some data to process the
invoice is missing, the invoice is put on “Invoice on Hold”; we will
discuss this in details in the subsequent unit (unit 6).
3. Thereafter, the invoices are sent for processing. Those invoices which were
sent against POs feed into a process called matching. Here the invoice is
matched against the PO to verify the items that have been charged are the
same ones that were ordered and that the rate mentioned is the same. Also
the invoice is matched against the goods receipt note (GRN) to verify that
the items that have been charged were indeed delivered.
There may be invoices that were put on hold due to certain issues. The
authorized approver clears or rejects any of these invoices that are on hold.
4 Non-PO invoices are those invoices where goods and services are procured
without corresponding PO. These invoices are sent to the buyer to get the
necessary approval from the authorized approvers.
5. In this step, the authorized approver approves any non-PO invoices in the
workflow.
6. The payment is made to the vendor.
Let us examine the processes (from step no. 3 onwards) in more details.

5.4.1 Purchase Order based Invoices

Purchase order based invoices (or PO invoices) are the ones where the goods and
services invoiced were supplied through a purchase order. The PO invoices can
undergo a “three-way match” or a “two-way match”.
Three-Way Match
A three-way match indicates matching three documents i.e. invoice, PU and GRN.
This usually happens when the purchase order has been raised for the supply of 51
Procure to Pay goods. Since goods supplied are tangible and the fact that they were received in
good condition can be indicated using a Goods Received Note (GRN), the invoice
needs to be compared with the purchase order as well as GRN. The scanned invoice
is pulled into the system. The invoice then under goes a three-way match. It is
matched with the concerned PO (the PO number is also mentioned on the invoice
and its details can be accessed by the invoice processing team) and the goods
received note (GRN), which also accessible to the invoice processing team. In
case the invoice does not match PO or GRN or GRN does not exist, then the
invoice is treated as exception and put on hold. We then follow “Invoice on Hold”
process. We will read this process in details in the subsequent Unit.

3XUFKDVH
2UGHU

,QYRLFHV

*RRGV
5HFHLSW
1RWH

Fig 5.6: Three Way Match

The process to clear the PO based invoices looks like as shown in fig. 5.7 below.
The steps followed in this process are:
1) The vendor sends the invoice to the address given by the clients for this
purpose.
2) The rnailroom sorts the invoices and hands them over to the scanning service
where the invoices are scanned into digital images.
3) Thereafter the scanning service team archives the invoice. In Archiving, the
paper documents are filed and stored safely in case they need to be referred
to in future. This is likely to happen if the scanning is not done well.
52
 Invoice Processing
Start

1- Vendor sends invoice to the AP

Mailroom/Scanning service
Vendor

2- The Scanning service scans

the invoice
AP Mailroom/
Scanning Centre

3- The Scanning service

archives the paper invoice
AP Mailroom/
Scanning Centre

4- The IP team accesses

scanned invoice
Invoice Processing
Team

5- The IP team indexes the

scanned invoice
Invoice Processing
Team

6- Check if the
scanned invoice is
clear If No
Invoice Processing
Team

If Yes

7- Check if
the invoice is Stop
a duplicate If Yes
Invoice Processing
Team

If No

8- Check if all
9- Request vendor to provide
the required data is
the missing data
available on the If No
Invoice Processing
Team
invoice
If Yes
10- Vendor provides the
missing data

11- The invoice data is entered

into the ERP
Invoice Processing
Team

Stop

Fig 5.7: Processing a PO based Invoke

4) The Invoice Processing (IP) team accesses the invoice using the document
management system.
5) The IP team indexes the invoice on the document management system.
6) A check is done to see if the invoice is legible. If not, the image is sent back
for rescanning.
7) The IP team checks whether the invoice has been sent in the past and whether
this version is a duplicate. If it is, then the invoice is not further processed.
8) A check is done to see whether all the data fields necessary to process the
invoice is present. 53
Procure to Pay 9) If not, request the vendor to provide the missing data for the invoice.
10) Once the vendor provides the required data, proceed to the next step.
11) The invoice related data is entered into the ERP for processing for payment.
Two-Way Match
A two-way match indicates matching two documents i.e. invoice and PO. This
usually happens when the purchase order has been raised for supply of services.
Since services supplied are intangible, a GRN cannot be raised for them. For
example, if the sales department hires an outside trainer to train its salesmen on
managing customer relationships, the trainer provides the training services.
Someone needs to confirm the services were received as per the details stated in
the invoice. Since GRN is not available in this case, the invoice is compared with
the PO only and then sent to the buying manager for confirmation, using workflow
tool. Taking the above example, once the training is over, no GRN is raised. The
person who hired the trainer needs to confirm that the training services were
delivered to his satisfaction so that the trainer can be paid. Once this confirmation
is received, the invoice is cleared for payment.

,QYRLFHV 3XUFKDVH
2UGHU
Fig. 5.8: Two way match
Ihe invoice processing team usually checks for the following:
x Whether the quantity supplied (as stated in the invoice) and accepted (stated
in GRN) matches the quantity that was ordered (stated in PO), in case of 3
way match.
x Whether the prices for goods/services (as mentioned in the invoice) match
the ones mentioned in the PO.
x Whether bank account information on the invoice matches the information
in the vendor master, if available on the invoice.
For processing an invoice, the invoice details mentioned on the scanned invoice
is keyed by the processing team into the ERP system. Some of the key fields that
are entered at this point are:
1. Invoice number
2. Invoice date
3. Date of posting
4. Invoice amount
54
5. PO number Invoice Processing

6. Quantities received for various items

7. Any additional charges like transportation costs, taxes etc.
The figure 5.9 shown below is how a screen looks like where invoice data is
entered.

Invoice processing

Basic Data
Invoice Date Invoice #
Posting Date Vendor
Amount
Tax Amount
Payment Terms

Invoice data

Item Amount Quantity Purchase Item PO Text

Order

Fig 5.9: Invoice Data Entry Screen

5.4.2 Non-purchase Order based Invoices

A large business usually receives 20-30% of the invoices which are not based on
a PO. Most of the clients have a stated policy and a set of guidelines on handling
such invoices.

x The invoice may not be numbered. This poses a problem while indexing
and tracking it. It can also potentially result in some duplicate payments.
x The vendor may not have been set up in the vendor master of the client,
when the invoice is received. The invoice has to be put on hold and the
55
Procure to Pay
vendor has to be set up first. This puts the pressure on The Service Level
Agreements of the invoice processing team as well as vendor maintenance
team.
x In the absence of a PO, the proof of purchase approval is not readily
available. Similarly, whether the goods and services have been delivered to
the end user’s satisfaction is also not known. Hence the invoices have to be
put on hold for buyer’s approval. This increases the lead time for invoice
processing.
x In the absence of the PO, the cost center and account codes under which
the expenses will be booked also needs to be determined prior to processing.
This is done by putting it on hold.

The main challenges with non-PO based invoice processing are:

x sending the invoice to the client (refer to invoice on hold process Unit 6)
This shows that the PO invoices are easier to process than non-PO invoices. Also,
due to the above reasons it is in the buyer’s interests to have a high PO coverage
for the buying process i.e. cover more purchases through the purchase orders than
outside these, to have a better control on spending.
The non-PO based invoices are identified and separated from PO based invoices,
by the invoice processing team and are sent separately for approval to the concerned
buyer/cost center head. The buyer confirms the receipt of goods/services, approves
the payment and also provides the cost codes under which to book the expense.
For processing of Non PO invoices, the team also needs to be equipped with the
list of valid approvers for various cost centers and their scanned signatures or
invoices are sent to them for approval using work flow. Once invoices are approved
by the respective approver, it will be ready for payment. The steps for processing
it are as follows:
1) The vendor sends the invoice to the address given by the clients for this
purpose.
2) The mailroom sorts the invoices and hands them over to the scanning service
where the invoices are scanned into digital images.
3) Thereafter, the scanning service team archives the paper version of the
invoice
4) The Invoice Processing (IP) team accesses the invoice using the document
management system.
5) The IP team indexes the invoice on the document management system.
6) The invoice related data into the ERP for processing for payment. A check
is done to see if the invoice is legible. If not, the image is sent back for
rescanning.
7) The IP team checks whether the invoice has been sent in the past and whether
this document is a duplicate. If it is, then the invoice is not processed further.

56
 Invoice Processing
Start

1 - Vendor sends invoice to the AP

Mailroom /Scanning service

Vendor
2 - The Scanning service
scans the invoice

AP Mailroom/ 3 - The paper invoice is

Scanning Centre
archived

4 - The IP team accesses

AP Mailroom/
Scanning Centre invoice image

5 - The IP team indexes the

invoice image
Invoice Processing
Team

6 - Check if the scanned

invoice is clear If No
Invoice Processing
Team

If Yes

7- Check if the invoice is Stop

a duplicate If Yes
Invoice Processing
Team

If No

8- Check if vendor is 9 - Request vendor master team

Invoice Processing set up on the System If No to set up the vendor
Team

If Yes

11 - Request vendor to
10 - Check if all the provide the missing
required data is available data
Invoice Processing
Team on the invoice If No

If Yes 12 - Vendor provides the

missing data
13 - Send the invoice to the
buyer for the cost code and
Invoice Processing
Team approval

14 - The cost centre

manager approves
Invoice Processing
Team invoice

15 - The invoice data is

entered into the
Invoice Processing ERP
Team

Stop

Fig 5.10: Processing a non-PO invoice

57
Procure to Pay 8) A check is done to verify if the vendor is set up in the vendor master file.
9) If not, then the invoice is sent to the vendor master team to set up. They
engage with the client to get the necessary details to set up the vendor.
10) The IP team conducts a check to see whether all the data fields necessary to
process the invoice is present.
11) If not, request the vendor to provide the missing data for the invoice.
12) Once the vendor provides the required data, proceed to the next step.
13) The invoice is sent to the buyer to give the cost code details and get the
approval of the concerned authority (usually the cost code manager).
14) The cost code manager approves the invoice for payment.
15) The IP team enters

5.4.3 Quality Performance Measurement

When the invoice processing process is outsourced then the client outsourcing
the process also measures the quality of the process and the performance of the
team which is working on this process. The performance measurement criteria/
parameters used for this are called process metrics. The metrics used to measure
the invoice processing (PO and non-PO invoices) are:
1. Accuracy: refers to the correctness of the data that are entered to process the
invoice. The accuracy metrics that is measured for invoice processing are:
a. Data entry errors in invoice processing per day
b. Payments to the incorrect party (by number of transactions)
c. Payments to the incorrect party (by value)
2. Turnaround Time (TAT): This is the average time taken to process the
invoice. The TAT metrics that are measured for invoice processing are:
a. Average time per processed invoice
b. Average TAT per rejected/on hold invoice
3. Productivity: This refers to how many requests have been completed within
a given amount of time. The productivity metrics that are measured in invoice
processing are:
a. No. of invoices processed per day
b. No. of invoices processed within agreed time (as per Service Level
Agreements).
c. No. of ‘on-hold’ invoices resolved per day
d. No. of invoices processed per person

58
 Invoice Processing
) Some of the common invoice processing errors that you need to watch
out for are:
• Invoice processed as credit note or vice versa.
• Invoice processed with incorrect amount
• Invoice Processed with incorrect payment currency
• Invoice processed to incorrect site (or incorrect profit center within
client’s organisation)
• Invoice sent to incorrect approver for approving the invoice
• Invoice matched with wrong lines in the PO
• Credit note not processed with immediate payment terms
• Multiple pages in an invoice (the Total of first page is processed instead
of the actual total which may be provided at the last page.)

5.5 CREDIT NOTE PROCESSING

As discussed in the Unit 3 (Source documents), credit notes are documents sent
by the vendor to the client, to acknowledge an amount payable from the vendor to
the client (buyer). This may be due to returned goods or to correct pricing errors
in a previous invoice.
Credit notes are received through the same channel as that for invoices (mailroom).
They need to be identified and processed as credit notes and not invoices. Credit
notes are identified, while documents are sorted during indexing. The credit note
carries the invoice details on which credit is being provided. It needs to be matched
with the related invoice.
Once the invoice is traced and opened in the ERP, the credit note details are entered
into the ERP against the invoice. These credit notes are set off against the future
payment of the vendor. If the related invoice details cannot be available on a
credit note, then the client specifies what needs to be done with the credit note by
defining a policy for it.

) Care needs to be taken to identify the credit note properly among the
documents received from the vendor. If it is processed as an invoice,
instead of deducting a credit, a vendor gets money it attempted to give
back to the client.
For example if the vendor supplied goods worth USD 12500 and the
client returned goods worth USD 3500. The vendor sends a credit
note for USD 3500. If the credit note is processed as an invoice, the
client will end up paying the vendor USD 16000 (USD 12500 + USD
3500) instead of USD 9000.

59
Procure to Pay
5.6 RETURN OF INVOICE
In some cases the invoices cannot be processed for payment and have to be returned
to the vendors. The reasons for which invoices are usually returned are:
1. The PO number mentioned on the invoice does not match or is missing.
2. Authorizer does not approve the invoice or has a disagreement with the amount
stated on the invoice (e.g. some discount that was promised on the purchase
may not have been passed on to the buyer).
3. Some crucial information is missing on the invoice which cannot be supplied
by the client also.

5.7 VENDOR ACCOUNT RECONCILIATION

When a vendor does business with an organisation (buyer), both of them (Vendor
and the organisation (buyer)) maintain an account of the transactions done with
the other party i.e. vendor maintains an account for the buyer and buyer maintains
an account for the vendor.
Ideally the transactions in both these accounts should be identical at any point in
time and hence the balances should also match. However in reality the account as
kept by the customer and that kept by the vendor may have differences. A separate
team called “Vendor reconciliation team” which is a part of the AP team (refer fig.
5.2) carries out the task of identifying these differences, investigating their reasons
and bringing them to the attention of the client so that these differences are
eliminated and both the accounts reflect the correct picture of the transactions.
This process is called the vendor reconciliation process.
The differences may arise due the following reasons:
x Invoice was raised by vendor but not received by the buyer.
x Invoice received but not recorded in buyer’s books yet.
x Invoice is “on hold” pending clarification.
x Payment made to vendor but not recorded in his books.
¾ Cash not applied by the vendor (i.e. vendor has not recognised the payment
made against the proper invoice).
¾ Cheque sent but has not reached the vendor (mail delays, sent to the wrong
party)
¾ Payment made to wrong party by the AP team
x Goods not received or received in damaged condition by the buyer.
x Goods returned back to vendor, not acknowledged by them.
x Discounts that the buyer was eligible for were not passed on to him.
x Any late payment penalties that should have been paid by the customer were
not actually paid.
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Allowing these differences to persist, without addressing the cause, and can lead Invoice Processing
to issues later. Some of these are:
x Poor vendor satisfaction.
x Vendor ends up chasing or asking for payments multiple times.
x Customer spends effort answering vendor’s queries.
x The relationship between the customer and vendor may suffer e.g. if the
customer keeps getting queries for the payments that have already been
processed he is bound to get impatient and irritated. Similarly if the vendor
does not receive his payments in time then he would be less willing to do
business with the customer in the future.
x The correct position of payables may not reflect in customer’s accounts. This
will affect the financial statements and also indicate poor financial controls.
x Some frauds may not be exposed if reconciliation is not done from time to
time.
The reconciliation team compares the vendor’s statement with the client’s own
statement of vendor’s account, reconciles the differences and recommend the
corrections.

Check Your Progress

1. Expand the following abbreviations (in the context of P2P):
a. EDI
b. ISP
c. GRN
d. PO
e. AP
f. ERP
g. TAT
2. Fill in the blanks:
a. The document that is required for a three way match but not in a two
way match is ___________
b. ______________ invoice get processed automatically and faster than
the paper invoices.
c. _______________document from a vendor could be mistaken for an
invoice and wrongly processed.
d. Out of all the steps in invoice processing, __________usually happens
at the client location.
e. Non-PO invoices are ___________ to process than PO invoices.

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Procure to Pay
5.8 LET US SUM UP
Invoice processing is the most crucial and effort intensive part of the P2P cycle. It
involves examining the invoice and making sure that the goods and services for
which the invoice has been raised have been received to the satisfaction of the
buyer.
The invoices may be received electronically or on paper. The electronic invoices
can be processed automatically. The paper invoices require effort to process. The
paper invoices are received in a mail room in the client location. They are scanned
and uploaded into the computer. The invoice processing team indexes them and
sorts them based on invoice / credit notes, PO & Non PO invoice etc. For PO based
invoices (which are sent for the goods supplied), a three way match is conducted i.e.
matching the contents of PO, invoice and GRN. When the services have been supplied
and invoiced, the GRN does not exist so the invoice undergoes a two way match.
For non-PO based invoices one needs to forward these to the buying manager
within the client’s organisation and get information on cost codes as well as the
approval for the invoice. After the approval is in place and cost code and cost
center is identified, the invoice can be cleared for payment.
Credit note is identified by a negative amount stated on it and the word credit
note/credit memo in its title. It needs to be identified properly and processed as a
credit note and not as an invoice.
Vendor account reconciliation also needs to be done from time to time. This is
done to make sure that the transactions recorded in client’s books of accounts are
identical to the ones recorded in vendor’s books and the differences are accounted
for or eliminated.

5.9 KEY WORDS

Accounts payable: It refers to the money due to the vendors for the goods and
services supplied by them on credit. Accounts payable team is the team within the
organisation that manages the accounts payable i.e. making payments to vendors
on time.
Credit Note: A document generated by the seller giving credit to the buyer for the
goods returned or excess payment etc. It is called a ‘credit’ note because it credits
(lowers the assets/ accounts receivables) the customer’s account.
Document management system: A software tool used to store and manage digital
documents or digital images of paper documents.
EDI: (Electronic Data Interchange) It refers to the set of standards that enable a
structured transmission of commercial data between organizations by electronic
means.
ERP: (Enterprise Resource Planning) It is a software tool which allows transactions
from all the business functions of an organisation to be recorded within it and
provide a single view of the state of the business.
Indexing: The process of classifying a document in a document management
62 system by assigning attributes like document number, date etc. and associations
with other documents. Indexing helps to search and retrieve documents faster Invoice Processing
from the document management system.
ISP: (Internet Supplier Portal) This refers to a website created by a buyer for its
vendors for them to do transactions directly with the buyer. The kind of transactions
done by the vendors on an ISP are Acceptance of a purchase order, confirmation
of purchase orders, submission of invoices, enquiring about the status of payments
on the invoices etc.
Metrics: Measurements taken on an activity to measure its quality.
Non-PO invoice: The invoice which is raised for items that were purchase without
a PO.
PO invoice: The invoice which is raised for items that were purchase with a PO.
Scanning: The process of converting a paper document into a digital image and
storing it on a computer.
Three way match: The process of comparing the contents of PO, invoice and
GRN to clear the invoice for payment.
Two way match: The process of comparing the contents of PO and invoice to
clear the invoice for payment.

5.10 ANSWERS TO CHECK YOUR PROGRESS

1. a. Electronic Data Interchange b. Internet Supplier Portal
c. Goods Received Note d. Purchase Order
e. Accounts Payable f. Enterprise Resource Planning
g. Turn Around Time
2. a. Goods received note
b. Electronic
c. Credit note
d. Scanning
e. Easier

5.11 TERMINAL QUESTIONS

1. Describe a ‘three way match’.
2. Describe how invoice processing can be done from a remote location.
3. Why are PO based invoices easier to process than the ones that are not based
on a PO? Describe how an invoice that is not based on a PO is processed?
4. Indicate some metrics that are used measure accuracy, TAT and productivity
in invoice processing stage.
5. How is a credit note identified? What are the implications of processing a
credit note erroneously as an invoice? 63