5 AUTHORISING AND CODING

5.1 AUTHORISING PURCHASE INVOICES

Purchase invoices should be authorised for payment before they are paid. There are two ways in which invoices may be approved.

The purchase invoices may be checked in the accounts department, against supporting documentation. If the invoice appears to be correct, it should be noted to show that the checks have been carried out, and then approved by a person with the necessary authority in the accounts department. This could be the accounts supervisor.

If the accounts department is unable to carry out the checks on the invoices, a copy of the invoice should be sent to a person who can check and confirm the accuracy of the invoice. This may be the manager responsible for the expenditure e.g. the purchasing manager

  • When the invoice has been authorised (with a signature of the appropriate person) it should be returned to the accounts department
  • If a discrepancy is identified and the supplier has agreed to provide a credit note, the invoice should not be approved until the credit note has been received, and the Invoice should then be approved at the same time as the credit note.

This process of approving invoices is important, because unless it is carried out properly and according to established office procedures, there is a risk that payments will be made that should not have been made. Similarly, credit notes should also be authorised prior to processing to ensure that any amounts owed to suppliers are correctly accounted for.

5.2 EXPENSE ACCOUNT CODES, ASSET ACCOUNT CODES AND SUPPLIER ACCOUNT CODES

Asset expenditure (i.e. expenditure on non-current assets, such as plant and equipment) and expense expenditure must be distinguished from each other. In addition, different types of asset expenditure and different types of expense are categorised according to their nature.

There is an account in the general ledger for each category of expenditure. These are commonly referred to as expense accounts, each having an identifying name and account number or code.

Asset expenditure results in the purchase of a non-current asset for use in the business, and there are asset accounts in the general ledger for different categories of asset expenditure, such as land and buildings, plant and machinery, equipment and motor vehicles.

Just as there are individual accounts in a receivables' ledger for each credit customer, a business also maintains individual accounts for each credit supplier within the payables' ledger. Each payables' ledger account has both an identifying name and account number or code. The payables' ledger is not part of the double-entry bookkeeping system, it is memorandum only information and will be updated simultaneously when the general ledger is updated.

When expenditure is recorded in the accounting system, the following reference names or codes are required:

  • the general ledger names or codes used to identify and record the transaction using the principles of double-entry bookkeeping
  • the payables' ledger name or code identifying the supplier to update the appropriate payables' ledger account.

5.3 NUMBERING PURCHASE INVOICES

It is common practice, for reasons of internal control, to allocate an internal, sequential, reference number to each purchase invoice. This should also apply to credit notes. This number should be recorded on the invoice or credit note itself, in addition to the payable ledger code and general ledger codes.

5.4 GRID BOX STAMP (OR FRONT SHEET)

A purchase invoice should not be entered into the accounting system and processed for payment unless it has been properly authorised. When the invoice is authorised after checks carried out in the 'payables section of the accounts department, there should be visible evidence that the checks have been completed.

This will result in either:

  • the invoice is correct and can be processed, or
  • a discrepancy was identified, the supplier contacted and a credit note has been received from the supplier and can now be processed.

Evidence of the check should be:

  • written on the invoice, perhaps as an authorising signature
  • entered into a grid stamped on to the invoice by the clerks in the purchase ledger section
  • written on a front sheet attached to the invoice by the clerks in the purchase. ledger section.

The same grid stamp or front sheet can also be used to write in the general ledger code for the expenditure and the supplier account code. An example of a front sheet is shown on the following page

The following details should be entered on either the invoice or a front sheet:

  • Date. This is the date the invoice is received by the accounts department. If a supplier is requesting payment of an invoice, this date can be used to check when the invoice was received, and so how long it has been unpaid.
  • Agreed to purchase order. There should be evidence that the invoice has been checked and agreed with the purchase order. In the example below, the front sheet does this by having space for the purchase order number and for tick boxes to show that the prices, discounts and credit terms on the invoice are the same as those shown on the purchase order. There could be another tick box to confirm that the quantities delivered are correct.
  • Agreed to delivery note. There should also be evidence that the invoice has been checked against the delivery note, and that the quantities on the invoice were the quantities delivered in good condition. In the front sheet below, the evidence is provided by entering the delivery note number, and by means of tick boxes for checks on the quantities and their condition.
  • Calculations checked. There should be evidence to show that the invoice has been checked to make sure that the calculations are correct. In the front sheet below, there are tick boxes to show that specific calculations have been checked.
  • Discrepancies. If any discrepancies or errors have been identified, a note should be written to explain how they are being resolved. If the supplier has agreed to send a credit note, the details should be noted.
  • Supplier account reference. The supplier account code should be noted.
  • General ledger account references. The general ledger account codes for the expenditure should be noted. There may be more than two general ledger account codes if, for example, sales tax on inputs needs to be accounted for or if the purchase invoice includes more than one product, with each requiring a different account code.
  • Discounts. Trade discounts may be detailed on the invoice and, if so, they should be checked. Remember that trade discounts are excluded from the amounts processed and accounted for in the general ledger. There may be a tick box to identify whether settlement discount terms, if offered, are to be accepted.
  • Signature and date. When all items have been checked, and the codes obtained, the document should be signed and dated by the checker.
  • Invoice authorised for payment. After the invoice has been checked, it should be authorised. Authorisation is evidenced by the signature of the person giving the appropriate level of authorisation to approve the invoice.
  • Invoice (and credit note, if there is one) entered in the general ledger. When the invoice is returned to the accounts department, it will be processed to update the general ledger and the memorandum-only payables ledger. Invoices may be processed in batches or in real-time as soon as all appropriate checks have been completed.

Purchase invoice check list

Date invoice received31 May 20X4
Purchase order number19853

Purchase order checks:

Delivery note numberAB5612

Delivery note checks:

Calculations checked:

Date discrepancies notified
To supplierNone
To department managerNone
Payable ledger account referenceP4234
General ledger account codesDr 500312; Cr 600753
SignatureG.T. Hobbs
Date8 June 20X4
Approved for paymentB.8 Barnes
Date10 June-20X4

ACTIVITY 3

1. A business received a purchase invoice for $400 plus sales tax at 20%. The supplier offers all customers a settlement discount of 2% if payment is received within 7 days of the invoice date.

What is the total of the purchase invoice, including sales tax at 20%?

A
$480.00
B
$489.60
C
$470.40
D
$392.00

2. An invoice was received from a non-sales tax registered supplier for $300. When checking against the original order the buyer noted that the agreed trade discount of 20% had been omitted as had a settlement discount of 5%.

What is the correct total of the purchase invoice?

A
$228.00
B
$240.00
C
$252.00
D
$285.00

3. A business subscribed for a trade magazine.

How should this invoice be accounted for?

A. It should be paid immediately
B. It should be diarised until the latest date when any settlement discount can be claimed and paid at that point
C. It should be matched with documentation providing evidence of the order, authorised and then paid
D. It should be rejected

For a suggested answer, see the 'Answers' section at the end of the book.