What Are the Steps of Invoice Processing?

Invoice processing is a systematic procedure that allows businesses to manage and track expenditures from receipt to payment. It ensures all financial obligations are accounted for and settled, supporting accurate financial reporting and healthy vendor relationships. This process helps businesses maintain control over cash flow and comply with financial regulations, contributing to overall financial health and operational efficiency.

Receiving Invoices

The initial stage of invoice processing involves receiving incoming invoices from vendors. Businesses get these documents through various channels, including postal mail, email, electronic data interchange (EDI) systems, and dedicated online portals.

Upon receipt, invoices are date stamped or digitally logged. This establishes a clear timeline for payment terms and internal processing. Physical invoices are often scanned into a digital format to facilitate electronic workflow. This ensures all incoming invoices are captured and prepared for review.

Invoice Verification and Matching

After an invoice is received, the next step involves thorough verification against internal records. This process prevents errors, overpayments, or fraudulent transactions by checking details like the vendor’s name, invoice number, date, and total amount due.

A primary component of verification is “matching,” which compares invoice details to corresponding internal documents. Two-way matching compares the invoice with the purchase order (PO) to confirm that billed items, quantities, and prices align with what was ordered. This ensures the business only pays for formally requested goods or services.

Three-way matching extends this by adding a third document: the goods received note (GRN) or service receipt. The invoice, purchase order, and confirmation of receipt are all compared. For example, if a business ordered 100 units but received 95, three-way matching flags this discrepancy before payment. This check reduces the risk of paying for unreceived items or unrendered services.

During this stage, specific details like unit prices, quantities, and sales tax calculations are reviewed. Discrepancies, such as an incorrect price or overbilled quantity, are identified. Finding a discrepancy triggers an investigation, which may involve contacting the vendor or an internal review. Resolving these issues promptly avoids payment delays and maintains accurate financial records.

Invoice Approval and Coding

Once an invoice is verified and matched, it proceeds to the approval phase, where authorized personnel review and sanction payment. The approval workflow varies by business size, internal policies, and invoice amount. For example, invoices below $1,000 might need approval from a single manager, while larger invoices, exceeding $10,000, often require multiple levels of authorization.

This phase also includes the essential step of coding the invoice, which involves assigning it to the correct general ledger accounts. Proper coding categorizes the expense accurately for financial reporting and budgeting. For instance, an invoice for office supplies would be coded to an “Office Supplies Expense” account, while consulting services might go to a “Professional Fees Expense” account. This classification helps prepare financial statements and provides visibility into spending.

Invoices may also be coded to specific cost centers or departments. This allows businesses to track expenses by the responsible area, aiding departmental budget management and performance analysis. The accounts payable team often facilitates this process, routing invoices to approvers and ensuring correct coding before payment.

Payment Processing and Recording

Following approval and coding, the invoice is prepared for final payment. Businesses use various methods, including electronic funds transfer (EFT) like ACH payments, and traditional paper checks. Some companies also use virtual cards, which are single-use credit card numbers for specific transactions, offering enhanced security.

Payment terms, such as “Net 30” or “Net 60,” dictate when payment is due (within 30 or 60 days from the invoice date). Businesses schedule payments to align with these terms, often taking advantage of early payment discounts.

After payment is initiated, the final step involves recording the transaction in the accounting system. This typically debits the “Accounts Payable” liability account and credits the “Cash” or “Bank” asset account, reflecting the outflow of funds. This entry closes the outstanding invoice and updates financial records. Maintaining an audit trail of all payments is important for internal control and external compliance.