How to Process an Invoice: From Receipt to Payment

An invoice is a formal request for payment issued by a seller to a buyer for goods or services. It is a foundational document in financial transactions, providing a detailed record of the sale. Businesses rely on accurate and timely invoice processing to maintain healthy cash flow, manage expenses, and ensure compliance with accounting and tax regulations.

Receiving and Verifying Invoices

Businesses receive invoices through various channels, including email, traditional mail, or electronic portals. Each invoice contains specific information, such as the vendor’s name, a unique invoice number, issue date, payment due date, an itemized list of goods or services, and the total amount owed. This information forms the basis for financial record-keeping.

Verifying invoice accuracy prevents errors, overpayments, or fraudulent charges. This process involves cross-referencing invoice details with internal documents, such as purchase orders, contracts, or receiving reports. A “three-way match” compares the invoice, purchase order, and goods receipt note to confirm that billed items or services align with what was ordered and received.

Discrepancies, such as incorrect quantities, mismatched prices, or missing purchase order numbers, can arise from data entry errors or miscommunication. If a discrepancy is identified, communicate promptly with the vendor to clarify the issue and request a corrected invoice. Resolving issues early helps prevent delays in payment processing.

Approving and Recording Invoices

After an invoice is received and verified, the next stage involves obtaining internal approval for payment and recording the transaction within the accounting system. An approval workflow dictates who needs to authorize payment, often based on the invoice amount or responsible department. This process ensures expenditures are legitimate and align with budgetary controls.

Assigning expense categories or general ledger (GL) accounts to the invoice, known as coding, is an accounting practice. This step ensures expenses are classified correctly for financial reporting and tax purposes. Each line item on an invoice might be assigned to a specific GL account, reflecting the nature of the goods or services procured.

After approval and coding, invoice information is entered into accounting software or a manual ledger. This includes inputting vendor details, invoice number, date, total amount, and due date. Modern accounting systems can automate much of this data entry, reducing human error and improving efficiency.

Making Payments and Maintaining Records

The final phase of invoice processing involves executing payment and establishing a system for record retention. Businesses utilize various payment methods, including checks, Automated Clearing House (ACH) transfers, wire transfers, or credit card payments. The choice of method depends on factors such as transaction speed, associated fees, and vendor preference.

Initiating payment aligns with the invoice’s due date and payment terms, such as “Net 30,” which indicates payment is due within 30 days of the invoice date. Upon payment, confirm the transaction’s completion and reconcile the payment with the original invoice and bank statements. This reconciliation ensures the accounts payable ledger accurately reflects disbursed funds.

Maintaining accurate records of paid invoices is important for financial audits, tax compliance, and future reference. Businesses can opt for digital archiving solutions, such as scanning and cloud storage, or traditional physical filing systems. The Internal Revenue Service (IRS) advises retaining most tax-related business records, including invoices, for at least three years, though some situations may require longer retention periods.