What Does It Mean to Process an Invoice?

An invoice is a formal request for payment issued by a vendor to a buyer for goods or services provided. Processing an invoice involves a systematic series of steps a business undertakes, from the moment an invoice is received. This process culminates in payment and accurate recording within the company’s financial records. Effective invoice processing is important for maintaining accurate financial accounts, fostering positive relationships with suppliers, and ensuring the smooth flow of business operations.

Receiving and Initial Logging

The invoice processing begins when a business receives an invoice from a vendor. Invoices can arrive through various channels, including traditional mail, email attachments, or electronic invoicing portals. The initial step involves noting the date of receipt, often by date-stamping physical invoices or recording the digital timestamp for electronic ones.

Assigning a unique internal identifier to each incoming invoice is standard practice, helping track it throughout its lifecycle. An initial check for completeness ensures the invoice contains fundamental details: the vendor’s name, total amount due, a basic description of goods or services, and a unique invoice number.

Businesses enter these basic details into an initial log or an accounts payable system. This ensures every invoice is accounted for from the outset, preventing misplacement or oversight. Prompt and organized initial logging sets the stage for efficient processing.

Verification and Authorization

Following initial logging, the invoice moves to a verification stage, where its legitimacy and accuracy are checked. This process involves cross-referencing the invoice against supporting documents. A common method is “three-way matching,” which compares the invoice with the corresponding purchase order (PO) and a receiving report or delivery confirmation.

The purchase order confirms the goods or services were ordered, while the receiving report verifies they were received in the correct quantity and condition. Beyond matching, verification includes checking for accuracy in pricing, quantities, extensions, and calculations on the invoice. Any discrepancies found must be resolved with the vendor before proceeding.

Once verified, the invoice requires authorization for payment. This approval confirms the expense is legitimate, aligns with company policy, and falls within budget allocations. The authorization process can vary, from a physical signature on a paper invoice to electronic approvals within an automated workflow system, often routed based on departmental responsibility or spending limits.

Executing Payment

After an invoice passes verification and authorization, the next step is payment. Businesses use various methods, including physical checks, electronic funds transfers (EFTs) like ACH transactions, and corporate credit cards. EFTs are often favored for speed and efficiency, while checks remain prevalent, particularly for business-to-business transactions.

Adhering to agreed-upon payment terms, such as “Net 30” or “Net 60,” is important. “Net 30” means payment is due within 30 days from the invoice date, while “Net 60” allows 60 days. Paying within these terms helps maintain positive vendor relationships and avoids late fees. Some invoices offer early payment discounts, such as “2/10 Net 30,” providing a 2% discount if paid within 10 days, otherwise the full amount is due in 30 days.

A remittance advice is generated and sent to the vendor. This document details which invoices are being paid, the amount applied to each, and any deductions taken. This helps the vendor accurately apply the payment to their accounts receivable records.

Recording the Transaction

The final step in the invoice processing cycle is accurately recording the payment within the company’s accounting system. This involves updating several financial accounts to reflect the completed transaction. Specifically, the accounts payable liability is decreased, the relevant expense account (e.g., office supplies, utilities, consulting fees) is debited, and the cash account is credited to show the outflow of funds.

This meticulous record-keeping is fundamental for accurate financial reporting, budgeting, and tax compliance. It ensures that financial statements, such as the balance sheet and income statement, correctly represent the company’s financial position and performance. For tax purposes, precise records support deductions and provide a clear audit trail for any inquiries from tax authorities like the IRS.

After the transaction is recorded, the invoice is typically marked as “paid” and then filed. This filing can be done physically in a secure location or, more commonly, electronically within a document management system. Retaining these records is often legally mandated, with the IRS generally advising businesses to keep tax-related documents for at least three years, and in some cases up to seven years or indefinitely, depending on the nature of the transaction and potential audit periods.