What is Invoice Processing? Definition & How it Works?

What is Invoice Processing?

Invoice processing is the act of validating and managing invoices received from suppliers or vendors. It comprises verifying the accuracy of the invoice details, and ensuring they match purchase orders. Upon validation, an invoice can be approved for payment.

After the payment is made, the details are recorded in a ledger, and the invoice documents are stored in an organized manner for tax or auditing purposes. Nowadays, such tasks are usually carried out by accountants using reliable invoicing software.

How to Process Invoices Properly?

The structure and size of an organization determine how account payable invoice processing works. For example, the appropriate accounts payable manager in a small business handles everything. However, several accounts payable executives in large firms will take each phase.

Before reimbursing the vendor, the accounts payable division must establish guidelines and invoicing procedures to follow. The repetitive manual tasks and mistakes may be avoided by strictly adhering to these rules and maintaining tight control over invoicing.

Invoice processing workflow is basically all about handling an invoice from the moment you receive it until the dues are cleared and the transaction is recorded. Here are the invoice processing steps that we will go through one by one.

1. Invoice received

The invoice process starts whenever you receive an invoice from a supplier. A vendor or supplier will send you an invoice receipt through online platforms or may hand it over directly to your office staff. You can then ask the account payable department to proceed further with the next step.

2. Invoice verification

Now the accounting team can verify the invoice to compare the total outstanding amount with the actual price written on the purchase order. Also, the team must check if the received invoice has the correct date and invoice number. If not, such things should be discussed with suppliers before it goes for approval.

3. Invoice approval

An invoice is en route for approval right after it gets a nod from the accounting department. At this point, executives are required to validate the invoice after briefly going through an invoice. Some businesses may require multiple approvals from executives, AP (accounts payable) department heads, and the company’s CEO before moving to the next step.

4. Invoice payment

If approved, the account team will proceed with the payment according to the terms and conditions. In most cases, payment is cleared in a short time to avail benefits of discounts offered by a vendor. You can pay the due amount via paycheck or online payment modes.

5. Invoice recording and Archiving

In this step, an accountant or bookkeeper can make an entry of successful payment in the general ledger. Later, keep the receipt or invoice copy saved in the document records so that you can easily access them at the time of audits. Additionally, they are also required to update the balance sheet with accurate payment details.

What is the Journal Entry for Invoice Processing?

Let’s pretend your firm, XYZ Company, made a credit purchase from ABC Company. In this instance, ABC Company will issue you an invoice for $1500 in merchandise bought on credit.

You will enter the amount due to the ABC firm for the products you bought on credit as an account payable when you get the invoice.

Journal Entry in XYZ Company Accounting Books while invoice receiving

Accounts receivable is how ABC Company shows that it expects to be paid by XYZ Company.

Benefits of Automating Invoice Processing

The invoice processing workflow may be exceedingly time and resource-demanding when done out at scale – for firms that receive hundreds of monthly invoices, for instance.

Manually entering invoice data into a central accounting system takes a lot of time in traditional accounts payable department, there is a considerable chance that manual data entry mistakes will occur, and handwritten invoices may easily be misfiled or forgotten.

The primary goal of invoice processing automation software is to eliminate these problems and improve efficiency and accuracy in the accounts payable department. Choosing automated invoice processing can make a significant difference in operating your business. Here are some benefits you obtain from using automation software for processing invoices.

1. Transparency

Unlike the conventional method, the automated process never lets you in the dark about invoicing details or payment status. Business owners get a bird’s-eye view of the invoicing process, helping them make an informed decision with accurate invoice data insights. This enhanced visibility allows you to identify and address any loopholes or areas for improvement easily.

2. Better Compliance

It frees up your employees from manually checking each document to ensure adherence to tax regulations or other specific terms. If an invoice is created through invoicing software, you can rest assured it complies with tax and discount requirements. It may need little to no effort during the verification stage.

3. Faster Approval

Sometimes you may have experienced how long it takes to process an invoice for payment approval. However, with the automated invoice process, you no longer have to wait. There is no paperwork to consume your time. You can review and authorize the invoice immediately, even if you are far from the office.

4. Long-term Collaboration

Invoice processing through automation software takes a few seconds to help your vendors get paid without any follow-ups or in-hand cash hassles. It keeps your vendors satisfied in such a way that they are ready to collaborate with your company for a long time, helping you develop a positive relationship with them.

5. Error-free Performance

The precision with which the entire process of invoicing is carried out is tremendously crucial. Overpayments and duplicate payments are two examples of tens of thousands of human errors that may occur when data is entered by hand; both negatively impact profits. Automating invoice processing may considerably lessen the probability of these mistakes happening with the creation of electronic invoices.

6. Defending Against Fraud

Payment fraud is always possible with manual invoice processing, but AI-powered invoice processing with three-way matching eliminates much of the risk as you can extract relevant data. In addition, committing fraud is far more difficult if only the proper individuals have access to the relevant resources, such as approving invoices and processing payments.

Last but not least, when you use invoice processing software, you’ll have a reliable, backed-up record of all accounts payable activities for use in audits and reviews. In addition, all related paperwork, including bills, receipts, and communications, may be linked together to provide a clear paper trail due to the automatic matching process. AP automation solution makes it hard to extract data from the entire organization and helps a business function safely.

Invoice Processing Best Practices

Here are some best practices for invoice processing to incorporate into your business’s financial operations to achieve desired growth.

1. Centralize Invoice Management

Businesses should manage important documents on a single platform to minimize data loss or misplacement. You can store invoices or receipts in a cloud environment, which prevents data leaks and aids you in accessing invoices from anywhere.

2. Improve Workflows

Verifying invoices in haste or frequent call-ups with vendors may not help in achieving business scalability. So, there should be a well-organized hierarchy that must be followed when it comes to processing fresh invoices. In short, improve invoice processing workflow to invest less time in paperwork.

3. Enable Cashless Pay

While it can be time-consuming to hand over cash to suppliers or vendors, you can go cashless with multiple payment gateways. This not only helps you make payments quickly but also facilitates the collection of payments from those who owe you.

4. Adopt Accounting Software

Since modern businesses are making the most of automation tools that significantly reduce their workload, you too can get one accounting system for automating invoice processing. Simply switch to advanced software that can handle all your invoicing tasks without manual dependencies.

5. Maintain Records

Instruct your team to keep up-to-date with the invoice records for a smooth auditing process. If that doesn’t work, choose cloud-based invoicing software to store invoices in an organized way. It ensures you survive tax season by importing data from the cloud-based invoicing platform.

Conclusion

To sum it up, we hope you have a clear idea of why automated invoice processing has an edge over the conventional method. It provides a digital transformation for small businesses to spend less time on administrative tasks and focus more on developing effective strategies. With such digital transformation, you can get rid of small yet costly invoicing mistakes and achieve timely payment completion.

It further helps you ace financial planning and develop healthy relations with vendors. Before concluding the blog, we hope you understand how the invoice process takes place. If you are mulling over the automated invoicing process, we recommend a 7-day free trial on Moon Invoice.

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