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Best practice for accruing invoices that haven't received.

How to deal with vendors that send out invoices late, past month end. We also can't accrue for the expenses because the statement they normally send out at the end of the month doesn't show all the purchases we purchased for the month. However, in the following month, we sometimes get an invoice out of no where from previous month purchased. What is the process to capture these expenses? By the way, we have our company does not have a P.O. system.

Answers

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

If the vendors do NOT have a monopoly on the items/service purchased, give them an ultimatum. Either send the invoices on time and complete or you will look for other vendors. You can also place provisions on your purchase contracts about late billings/details.

You do NOT have to suffer for your Vendor's inefficiencies/shortcomings. You have the bargaining power. This is of course after all "diplomatic" courses have been exhausted. Sometimes, the "my boss needs to talk to your boss" option works wonders.

Sara Voight
Title: Controller
Company: Critical Signal Technologies, Inc
(Controller, Critical Signal Technologies, Inc) |

You need to establish a PO system, even if it is a simple in-house excel saved as a PDF format. Then you need to communicate to your suppliers/vendors that no purchase can be processed without a PO. For my slow invoicers (and I have a few that send very large invoices), I make it clear that I view the invoice date as the date the invoice is received. So they are out of luck if they email me a $75K invoice on the 22nd, dated for the last day of the prior month. We use a date stamp for the paper mailers and we keep the envelope to record the mail date. It only takes a few months of showing that we did pay timely based on the received 'Invoice Date' of the 22nd for them to start making us a priority to invoice quicker.

Internally, you need to be able to explain to the people ordering supplies, why knowing about these orders is important to your bottom line. That means you will have to walk through their purchasing for a few months hand in hand to help them learn a new process. Make time monthly to sit down with some of the key people to go through all the possible categories of ordering to help them jog their memory while bringing a PO system online. I find that the constant polite nudging can lead to others voluntarily providing me with what I need in advance, as opposed to taking up their time later.

Externally, you need to find a way to encourage some of the suppliers to speed up the process. Whether they are a mom and pop who only sees their bookkeeper once a month, or they are cash rich and not in a hurry to get your payment, they need to understand that providing timely invoices is as important as the products or services they provide to you. This will be another time investment to work with them as a partner and not an adversary, but it can pay off for them with better internal reporting for their owners as well.

Finally, you need to be familiar enough with the operations of your company to try to estimate for the unknowns. Having an auditor request a year end adjustment for an invoice not received timely can be eye opening for management as well.

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

I would try to make this a management/operational issue, not an pure accounting issue, so that you can get the attention of the CEO.

Example:
As your boss and/or the CEO this question: " What would you do if one of your top managers/executives:
-held back vendor invoices totaling $xxx last month OR
-failed to inform us of a major claim for a refund by a customer of $xxx
that resulted in us materially falsifying our results to the board last month?"

Then explain to them that if the organization as a whole does not help get transactions entered in a timely manner, then delays in recognizing expenses through laziness/poor processes have the same effect as falsifying results.

Once your boss/CEO "gets it" show them a few examples to prove your point and enlist their help to change organizational behavior (as suggested by Sara above), introduce your new PO process and inform vendors of your updated requirements re prompt invoicing.

Steve Sheridan
Title: Associate
Company: Dean Lewis Associates
(Associate, Dean Lewis Associates) |

I agree with Sara. You need a PO system. Our company has a gl account called "PO Clearing". When a PO is received our accounting system increases inventory and this PO clearing account, which is under accounts payable in our gl. When we finally get an invoice and post it, the PO clearing is reduced and the payables increase.

amitabh khanna
Title: FD
Company: Utiba
(FD, Utiba) |

I understand that there could be other viewpoints that apply equally well.in my view a p.o. represents a commitment made by a corporate and till goods and or services are not received we ought to make no addition to accounts payable or I inventory.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

I believe there is a mish-mash of correct suggestions for a multitude of different issues.

1. You have goods and services ordered (here is where a good PO system helps).
2. You have goods and services received (again, PO system as well as other systems assist).
3. You have a properly approved invoice entered in your system.

You also have 3 different financial and managerial timed events.

Ordering is a Management event, not a financial event.
Receipt of goods and/or services triggers both a Managerial and Financial event.
Entering the invoice closes the cycle of both events.

So, when you issue a PO, as stated there is no impact to the company.
When you receive the goods and/or services, a financial transaction has taken place. By the end of the month you either need to have the invoice (which is clearly not the case as described by the "question writer") or accrue an good faith approximate cost for the goods and services.

When you finally get the invoice, especially after a month close, you would reverse the accrual and enter the actual.

Ken Mason
Title: Controller
Company: Pascua Yaqui Tribe
LinkedIn Profile
(Controller, Pascua Yaqui Tribe) |

Wayne finally made the key point, that the company does not have an expense until goods are services are received. A purchase order documents the authorization and encumbers funds in a government accounting environment and it is the receipt that can/should clear the encumbrance. Ideally you would not even need an invoice to record the expense, which calls for a few things:

1. Item-based purchase orders for all procurement of goods;
2. Centralized receiving with timely entry;
3. An accounting system that records the expense/liability based on the receipt.

In that environment, the invoice's sole purpose is to be entered for payment and clearing of the liability. If there are discrepancies between PO and invoice, those need to be resolved, but that is beside the main point.

Anonymous User
Title: CFO
Company: Local Government Agency
(CFO, Local Government Agency) |

Ken:

Us governmental types who understand obligation accounting have to stick together. ;-)

You beat me to the punch on that one.

Sachin Gupta
Title: Head - Mobile Data
Company: Tata Teleservices limited
(Head - Mobile Data, Tata Teleservices limited) |

Agree with Wayne and Ken,

A properly defined PO system shall keep you notified with the maximum amount of liability can come up for the time period of PO (as stated in PO terms), but it is important to accrue cost every month. This has to be done basis of partial or full completion of job (goods or services).

Process of deciding partial or full can be tracked through excel sheet, operation software etc. You can chose the method to record the transaction and then % completion can be numerical process pre-defined in system. Amount of charge is just a resultant.

Anonymous
(CFO) |

I am addressing this to all of those here who suggested implementation of a PO system:

What do you do when you come to work for a small, governmental organization that has never understood POs or PO process and used them sloppily while viewing them as just an approval to purchase something based on the hierarchy of authority for purchasing goods or signing contracts that had been laid out?

I've been trying to get a PO system in place here but have met with nothing but resistance from operations, marketing and maintenance. I've tried to get purchasing on board but our procurement person avoids responsibility like the plague.

In attempting to get our CEO behind it, she took it as me challenging her authority and things went downhill from there.

Our independent auditors have been of little help. They don't even bother timely preparing their MOIC because they know the CEO does not share it with the board! Ditto for federal and state grant auditors.

At one point last summer, when the COO called me a bean counter at a meeting about the PO issue, I thought I'd finally hit the proverbial straw that broke the camel's back and began to prepare a resignation letter.

But, self interest got the better of me. They pay me a lot of money so, if they aren't interested in my opinion of best financial practices but continue to sign my paychecks, then so be it. After all, I may be CFO but I'm not an NEO in the organizational charter. I can't go to jail for this. But, the CEO can. ;-)

Kevin Roones
Title: Senior Accounting Professional
Company: In-between
(Senior Accounting Professional, In-between) |

I agree with Wayne's reply. Since you are asking for best practice, I would also add that the accrual for items purchased and received, for which an invoice has not yet been received, should go to an account like "Accrued Accounts Payable" or "Accrued Expenses." Journal entries should never be made directly to Accounts Payable; the only activity in AP should come from the AP system or sub-ledger.

Ken Mason
Title: Controller
Company: Pascua Yaqui Tribe
LinkedIn Profile
(Controller, Pascua Yaqui Tribe) |

Quite correct, Kevin. I do not allow manual entries to the A/P control account, which would compromise the relationship between general ledger and sub-ledger. We use Accrued Accounts Payable, as you suggest.

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