An invoice is a document that contains a record of a transaction between a buyer and a seller. The transaction involves the exchange of goods and/or services. The invoice is time-stamped and includes the transaction amount. It is imposed by the seller on the buyer of goods or services.
Invoices can be referred to by several different names, including invoice, bill, debit note, sales invoice, and receipt. It can be in both physical and electronic or digital forms. The invoice is one of the most commonly used commercial documents. The first evidence of paper invoices can be found in the 16th century. The first type of paper invoice was more similar to a letter containing transaction information.
Invoice can be grouped into two major types;
- Manual Invoice
- E (Electronic) – Invoice
A manual invoice is one that is created by hand. Even if an invoice is created on a computer and printed on a printer, it is still considered a manual invoice if it is processed through a manual accounting system. A manual invoicing system is subject to mistakes, is time-consuming, slow, and unreliable.
E (Electronic) invoice
The terms e-Invoice, electronic invoice, and digital invoice all refer to the same thing. These are the invoices generated by a computerized invoice processing system with a robust database. e-Invoice has recently evolved significantly. From simple AP (Accounts Payable) automation to an invoice processing system (handling both AP and AR), it has now evolved into an invoice management system (invoice processing + invoice financing/factoring).
What is Invoice Processing
By definition, invoice processing is a business function performed by the accounts payable department that consists of a series of steps for managing vendor or supplier invoices from receipt to payment and recording in the cash book.
Invoice processing is frequently done with software, which is known as automated invoice processing or invoice automation for short. An invoice processing flowchart is a structured guide that details how accounts payable processes vendor invoices.
From capture to payment, this process is carried out in a series of sequential steps supervised by the AP department. The information contained in the invoice, regardless of its format, must be recorded to the general ledger in the company’s ERP or accounting system.
The Invoice Process: Step by Step
The traditional invoicing process begins with your supplier sending you paper invoices in the mail or PDF invoices via email or other online mediums.
Following that, the invoice is assigned for processing internally, which involves scanning or manually entering the invoice data into your ERP system or accounting software.
The invoice amounts must then be checked and approved for payment, which may require them to be coded for the correct account, project, or cost center. If your company uses purchase orders, this process may also include PO matching.
Finally, before being processed for payment, the invoice is sent to the appropriate person, usually a department head, for review and final approval.
What is the journal entry for invoice processing?
When you receive a vendor invoice, you must enter it into your company’s accounting system. The invoiced amount becomes an account payable (AP) and is commonly offset as an expense on the income statement after being recorded as a liability on the balance sheet.
How to Enter an Invoice Into the Accounts Payable System?
To enter an invoice into the accounts payable system, follow these five simple steps:
- Once the invoice has been approved (as described above), enter it as a credit in your general ledger’s accounts payable account.
- When an item is entered, it is labeled as an “open invoice.”
- Insert the invoice payment date based on the predefined terms (consider taking any discount opportunities that have been provided).
- Deduct the amount from the relevant accounts (the majority of AP items are recorded as expenses on the income statement, but there are cases where an offset can be recorded to prepaid assets or fixed assets).
- When an open invoice is paid, it is deleted from accounts payable and offset credit into cash.
Invoice Processing Automation
Manual invoice processing is time-consuming, costly, and inaccurate. According to Levvel Research, 50% of businesses have yet to automate their accounts payable processes, while 24% scan and email their invoices, and 23% depend on manual processes.
Accounting teams can achieve the following benefits by automating the invoice management process:
- Accounting teams can continuously process vendor invoices quicker and more effectively by automating the invoice management process.
- Stop losing invoices and having to go back to vendors for a copy of those documents.
- Remove late fees charged by vendors when bills are not paid on time.
- Can use early payment discounts that many vendors provide in return for giving bills within 10-15 days of receipt.
- Remove the need for manual data re-entry across multiple systems, which wastes time, manpower, and effort.
- In a world where the next customer is literally one screen tap or mouse click away, good supplier relationships are essential.
- Maintain the supply chain by ensuring that vendors are paid and materials/supplies are flowing into your company as planned.
How does AP Invoice Automation Works?
First, the invoice can be received via mail or email. If you get it by email, the invoice is directed to a dedicated email address that sets up the OCR capture process. secondly, if received by mail, the scanned document can be uploaded for automatic capture.
Once the invoice is captured, coded, and approved, it is directed to the ERP. Essentially, all invoice information is synced safely with your ERP/accounting system.
Invoice Processing Automation Software
Automated invoice processing software allows companies to take a more quiet approach to accounts payable management. It also helps accounting teams to focus on important tasks.
Additionally, Key software functionality covers standardized coding, automated approval workflows, and dashboards that show which sellers have paid, what invoices are set for payment, and which still need to be approved.
This is a developing blog, stay tune for further information…