Almost all of us know about invoices but not many of us know much about invoice processing. In this article, we will learn about invoice processing.
Before diving deeper into invoice processing, let’s revise some basics.
An invoice is a commercial document that records the transaction between two parties where one party extends some goods and/or services in exchange for a sum offered by the other party for the same. An invoice can be a call of instant payment or future date payment. The invoice is drawn by the seller of the goods or services upon the buyer of the same.
In business accounting, an invoice is treated in two heads depending upon its orientation.
· Accounts Receivable
· Accounts Payable
When a business draws an invoice upon its customers/clients against the goods or services provided. The due amount is considered an asset and is recorded under the head ‘Accounts Receivable’. The businesses consider accounts receiveable into their cash flow management. Sometimes the businesses seek short-term loans against their accounts receivable. This type of financing is called business financing.
When a business buys some goods and services and gets invoiced against the same by its supplier/vendors, the amount business owes to their supplier is recorded under the head ‘Accounts Receivable’ This amount payable by the business is treated as a liability. Accounts receivable are very important from a business point of view. It is important to consider accounts payable while planning the cash flow.
Now that we have a clear idea about the invoice, accounts receivable, and accounts payable, let’s take a look at invoice processing.
Invoice processing, as the name suggests is about a process that governs invoices. The term invoice processing covers the whole lifecycle of an invoice in an organization. The invoice journey begins with the procurement of goods or services and ends with the payment of the same. Invoice processing is usually associated with the accounts payable.
Invoice processing can either be manual or electronic or (automated)
From a business perspective, invoice processing begins when an invoice is received and ends when the due amount. The process has some core functions/steps.
· Invoice Reception
· Invoice Validation
· Invoice Approval
· Invoice Payment
The supplier sends the invoice for the goods or services provided by them to the business. This invoice can be in a print form or an electronic form (email, pdf, or directly entered into the system). The business records the invoice into the accounting system. (Manual or Electronic).
The next step is to verify and validate the credentials of the invoice. The invoice can be matched with the quotation, purchase order, or delivery receipt. The item specification, quantity, price, and terms and conditions are validated. Validation can be done by a single designation or multiple designations according to the company’s workflow or SOPs.
Once the credentials of the invoice are validated, the invoice is approved or sent for final approval. The invoice is approved after verification. The invoice validation and approval can be assigned to different designations/individuals according to the company’s workflow. During the process of invoice validation and approval, an invoice can be subject to revision, modification, and rejection.
After the approval of an invoice, the next step is invoice payment. Invoice approval doesn’t necessarily mean instant payment. An invoice can either be paid instantly or can be held into the system for a future payment. The invoice payment can be a cash payment or a digital payment through some connected payment gateway.
The above steps can be different from organization to organization. Each business can have a different workflow that suits them.
Manual invoice processing is a tedious, costly, inefficient, and error-prone process. In a modern business, invoice processing is mostly automated. An automated invoice processing is significantly speedy, efficient, cost-effective, and accurate as compared to manual invoice processing.
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