Accounts Payable System: Special Cases and Special Processing Features - Part 5
This is the 5th article in a series about Accounts Payable. This material is adapted from The Automated Accounting Systems and Procedures Handbook (John Wiley, New York 1991) Chapter 6.
SPECIAL CASES AND SPECIAL
VOUCHER PROCESSING FEATURES
The features, capabilities, and processes just covered address the mainstream flow of information through the voucher creation process. A good accounts payable system will also have a wealth of features for handling conditions and transactions that occur outside of this mainstream. Many of these features are activated using fields shown on the secondary invoice entry screen.
Debit and Credit Memos. Debit and credit memo transactions are occasionally required to adjust vendor accounts. They can originate from three sources:
- The Purchasing Department. The purchasing department can enter a special purchase debit/credit memo transaction that notifies the accounts payable department to approve a corresponding accounting debit/credit memo.
- The Vendor. The vendor may initiate a debit or credit memo by sending one directly to the accounts payable department.
- The Accounts Payable Department. The accounts payable department can initiate a debit or credit memo without prior notification from either the vendor or the purchasing department
After the accounts payable department receives notice of a debit/credit memo, the debit/credit memo can follow the same processing flows as a vendor invoice. In fact, many accounts payable systems use a voucher type code to identify the voucher either as an invoice or as a debit/credit memo. A flexible system will allow an accountant to further classify debit/credit memo transactions by entering a reason code with each one. This can help management track and report occurrences of returned items, overpayments, retroactive price adjustments, or defective parts.
Freight and Sales Tax Charges. Many systems have a feature for preauthorizing vendor freight and/or tax charges. They allow each purchase order to stipulate whether either of these charges are allowed on a vendor's invoice. This feature may be preset by indicators on the company table or the vendor file, but the purchasing department can override this to indicate particular conditions when opening a purchase order.
As example of how this feature works, suppose that the buyer understands that freight may be charged for items in a particular purchase order, but he has arranged that there will be no freight charges on this order. The buyer indicates these conditions when entering the purchase order. When invoices are actually received against that purchase order:
- Sales taxes may or may not be present, either case is allowed.
- If any freight charges are present, the system suspends the invoice from further processing by changing the voucher's status code to indicate this exception condition.
Suspended vouchers must be resolved through discussions with the vendor and the purchasing department.
In this the sales tax was either allowed or not allowed. The system may permit the buyer to specify that the sales tax is actually required on the invoice. This provision can be useful for ensuring that the vendor charges proper sales (or use) tax and avoids the accounts payable department's accounting for these liabilities.
Vendor Price Changes. The purchasing system retains amounts indicating the agreed on price for a purchase transaction. A quote variance occurs when the actual invoice amount differs from this authorized amount on the purchase order. In this case, the system's mechanism of using a tolerance to check the quote variance becomes important.
The tolerance is a preset amount that causes an exception to occur when a quote variance exceeds the tolerance. When this happens, the system suspends invoices from further processing. These invoices will not be paid without additional action. Usually a purchasing agent or controller must be contacted to approve an invoice suspended for this reason.
The tolerance may be set to check the total invoice amount, the net invoice amount (net of freight and tax charges), and/or the individual line items. It is usually expressed as a percentage, but some systems allow the tolerance to be stated as an absolute amount.
Updating Average Unit Costs for Inventory. When the accounts payable system is updating average unit costs, the delay between invoice receipt and the receipt of product shipments can cause anomalies in unit product costs. This is due to the delay between the update of the inventory quantities and update of the associated inventory costs.
Consider the example of Figure 6-10. The average unit cost of product issued to project “Westar” is inaccurately shown to be $1.00 per piece, rather than the $1.05 per piece that it should be. This occurs because of the late receipt of the higher costing invoice. As it turns out, the net effect on aggregate inventory costs goes to zero over time (the proof is left to the reader); however, in the meantime:
1. Inventory issued to project “Westar” will be understated.
2. Inventory issued to the next project may be overstated.
3. The average inventory cost at any point in time becomes inaccurate.
Standard costing is one way around this problem. However, even in an average costing environment, the accounting department can virtually eliminate this costing problem by adjusting the average unit cost at the time of receipt by using the quoted amounts from the purchase order. When the invoice finally arrives, if there is a quote variance, the accounting department must enter this as a separate transaction, that is, the quote variance becomes an adjustment to the average unit cost for any affected items. In average costing environments where quote variances are rare, this approach virtually eliminates any timing problems with respect to inventory costing. Even when quote variances occur, this technique of updating inventory average unit costs can be highly beneficial.'
Voucher Template. A voucher template is a convenient feature that assists the operator in entering frequently used invoices. All businesses have routine invoices, such as monthly utility bills or invoices for materials purchased from a particular vendor that must be entered repeatedly. A voucher template holds the basic information needed for building a frequently entered voucher and can greatly reduce voucher entry time. The operator calls up a specific template via its ID and adds a few additional fields, such as amount and date, that are unique to that transaction.
To be particularly helpful, the system can display a list of all templates and their descriptions and allow the operator to select from the list. This capability relieves the operator of having to memorize template IDs.
Temporary Vendors. When a vendor is used once or twice and may never be used again, vendor information can be stored temporarily. The operator indicates this by placing the temporary vendor indicator on in the vendor maintenance screen. Accounts payable systems usually purge temporary vendor records after the invoice has been paid1. The advantage of using this feature is that it avoids cluttering up the vendor master file with information on obsolete vendors. This also expedites voucher processing to the extent that invoices for vendors not on file can be efficiently processed.
There may be internal control ramifications to using this feature. The system must enforce sufficient segregation of duties so that someone cannot set up a bogus vendor, enter invoices for that vendor, and approve them. Generally, anyone who enters temporary (as well as permanent) vendor information must not be allowed to approve the invoices for these vendors. As a partial, after-the-fact control, the system does retain an audit trail of all vouchers for temporary (and permanent) vendors on the voucher history file.
Employee Expenses. Most accounts payable systems have special adaptations for processing employee expenses. A separate input screen for employee expense voucher entry is often necessary because employee expense forms usually contain different information or are laid out differently than vendor invoices (Figure 6-11). Notice that the screen in Figure 6-11 excludes certain features and certain data fields, such as fields for invoice terms or discounting. Since no purchase order exists, all purchase order matching features will not appear on this screen.
Processing employee expenses may require a special edit report, indicating delinquent expense reports. Other special requirements for employee expenses may also be necessary, but generally these can be satisfied with the standard voucher processing features of the accounts payable system.
Vouchers from Other Applications. Besides paying employee expenses and vendor invoices, many businesses adapt the cash disbursements function of the accounts payable system to paying distributions created and approved through still other business systems. Examples vary by industry: insurance claims, royalty payments, payments to contracted medical providers, interest payments, and dividend payments to stockholders. Chapter 7 discusses further how the accounts payable system accommodates this.
Recurring Vouchers and Recurring Payments. Recurring vouchers allow the accounts payable system to make a series of timed payments. The operator must define to the system the timing and amount of these payments when entering the voucher. Based on this information, the system will generate a series of payments according to these instructions.
There are two distinct variations to this: recurring payments and recurring vouchers. Recurring payments are characterized by one voucher and many payments. They may be used, for example, to pay a single, large invoice for office equipment with a stream of smaller payments. The system will treat recurring payments as shown in Figure 6-12, generating a single distribution to affected the general ledger accounts. (Each payment, of course, causes its own general ledger activity, not shown in Figure 6-12.)
A recurring voucher is a special voucher transaction that generates several payable vouchers. As Figure 6-13 shows, the distinction is that this causes several separate general ledger expense distributions, one for each successive voucher. Recurring vouchers are useful for making rent payments, mortgage payments, and lease payments.
General Ledger Adjustments. What happens if the accounting department identifies that a particular voucher has been distributed to the wrong general ledger accounts? When this occurs, the accounts payable system should allow the distribution to be reversed out of the incorrect general ledger accounts and placed into the correct ones. The system can use a special screen for this voucher distribution adjustment.
Not only does this feature allow the accounts payable system to store the complete distribution history for the corrected voucher, but it also allows the accounts payable department to make this correction. The general accounting department need not intervene.
Special Handling. The voucher can be coded to require that its payment not be combined with the payment of other vouchers for that vendor. This will be useful, for example, if it is to be hand-carried to the vendor by the sales representative. By setting a special handling code on the voucher, the system allows the payment to be separated from the mainstream of the checks processed.
Voiding Vouchers. The operator can void a voucher should the need arise to either reenter it differently or just remove it from the system altogether. The system responds to this request by reversing the general ledger distribution if the distribution was posted. Also, the system may adjust the purchase order by reversing the effect of the invoice matching process. In reversing this activity, some accounts payable systems will make the purchase order appear as if the voucher was never entered. The system does not need to print a check for a zero amount when a voucher is voided, as long as the voucher history file records that the voucher was voided.
The system will not allow a paid voucher to be voided. In this case, the check should be voided if it has not cleared the bank. Chapter 7 explains voiding payments.
1When 1099 reporting must occur for this transaction, the system retains the master file record until year end.
Next Month's topic: Period End Processing
| About this article and the author: |
Doug Potter is the owner of The Newport Consulting Group a professional management consulting organization that provides clients with information systems planning, selection, and implementation services. He can be reached at dpotter@newportconsulting.com or through his Web site, http://www.newportconsulting.com.
Note: The contents of this article were excerpted from Mr. Potters book "Automated Accounting Systems and Procedures Handbook" Copyright 1991 by Douglas A. Potter, published by John Wiley & Sons, Inc. New York
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