2012 by ePalmleaf ITES Pvt Ltd - All rights reserved.

Payment Process

2012 by ePalmleaf ITES Pvt Ltd - All rights reserved.
Payment Process: Payments are processed by businesses for varied reasons and each
of these could follow a different process. The primary requirement would be a three way matching of the
available documents. One is a Contract or order released by the business for procuring the materials, two
is the document created by the company during the receipt of the materials and third the invoice or bill
sent by the supplier requesting payment. These three documents have to be matched and verified for
correctness and then the payments are initiated. Payments from a business could be for the following
activities.
Payment for Procurement of Goods
Payment for services
Payment for expenses
Payment of Dividend
Advance payment
Loan Repayment
Bank Transfers
Cash Withdrawals

Payment for Procurement of Goods / Services : The process followed depends on the system of
accounting followed by the Business. If the business is following Cash accounting, then all payments are
made on the due date or later and accounted as an expenditure on the date of making the payment. As
discussed in the earlier chapters, cash accounting recognizes all payments made for expenses at the
time of making the payment and not otherwise. On the other hand, if the business is following the
mercantile accounting or Accrual Accounting system which is mandatory for companies , the purchase or
expense is recognized at the time of making the purchase (transfer of the title of the goods) or at the time
of consuming the expense and not at the time of making the payment. There could be an agreement to
obtain delivery of goods or services immediately but the payment could be on a later date/periodic
intervals. . For Example: On a post paid connection of a mobile phone, the bill comes once every billing
cycle. The consumption of the expenses is during the billing cycle. But the due date of payment is about a
fortnight later.
An electric bill comes to the office for consuming the electricity for the month of September on the 2
nd
of
October. The due date for making the payment could be 15
th
of October. In the case of cash accounting
the expenses is treated in the month of Payment that is in October (since due date is in October) whereas
in case of accrual accounting, the expenses are considered on the mo nth of consumption, ie. September
and not in October.
This process of accounting the expenses in the month of consumption gives raise to another transaction
at the time of the contract or at the time of the consumption. This transaction is the process of accounting
a Purchase Journal.
o Purchase journal: A Purchase Journal is a document created after performing the three way
matching as discussed earlier. The three way matching is done between :
o Purchase Order
o Material Receipt Report

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o Supplier Invoice
o . This process of creating a Purchase journal has two parts.
o
o Part one refers to the bill matching processes. Here the Suppliers invoice is matched with the
Materials Receipt Report.
o
o The second level matching is done by matching the purchase order for the matched bill. We need to
understand the three components of the Purchase journal before understanding the process.
(A) Purchase order: This is a document raised by the organization on a supplier for supply of materials
or services The Purchase order would reflect the requirement of materials/services by the organization,
Terms and conditions pertaining to the purchase / specifications / price / lead time for supply / payment
terms etc. This document is signed by the representative of the business and sent across to the supplier.
This becomes the basis for the supplier to supply the materials. A standard Purchase order would have
the following data.

(i) Product / component to be ordered: The business would need to specify the Product or
Component ordered in the PO (description of the product or the product name). The product
could be meant for trading or may be an input for a manufacturing process. For Example: Smart
Apparels orders cloth from reliance. This undergoes another process and then the cloth is
transformed into a shirt.

(ii) Technical Specifications of the product: Technical specifications of the product include the
type nature and texture of the product to be purchased. For example: Smart apparels while
purchasing cloth from reliance would have to specify the texture of the cloth / the count of the
thread used / the combination of cotton content in the cloth etc.

(iii) Supplier part number: The Supplier of the materials based on the classification /
specification of the product would have its own system of identification of the materials which are
denoted by part numbers. Mentioning the supplier part number in the Purchase order enables the
supplier identify the part easily.

(iv) Organisations Part number: When an organization orders parts rom different suppliers, it
may be difficult to use the supplier part number for identification of the component as different
suppliers might use their own internal systems and allot their part numbers, moreover the
organization might has a different purpose for the product ordered and would want o classify the
components to ensure easy storage / retrieval of the components. To enable uniformity in the
organization, Organizations have a coding system suitable to the purpose of the organization
and allot part numbers for all the components / products purchased.

(v) Quantity ordered: The quantity of the goods ordered is specified in the PO. This ensures the
supplier supplies the exact requirement of the organization and not more / less based on his
whims and fancies. Moreover, some low value products might have a minimum order quantity
specified by the supplier less than which he would not be interested in supplying the materials.

(vi) Unit of Measure: Depending on the product the unit of measure could differ. For smart
Apparels, which purchases cloth, the unit of measure could be meters, while purchasing

2012 by ePalmleaf ITES Pvt Ltd - All rights reserved.
buttons, the unit of measure could be units, while purchasing lubricants for the machines the
unit of measure could be in litres. One cannot buy lubricants in meters or cloth by litres. Hence
the unit of measure of the product is an important information in the PO.

(vii) Rate / Price: Rate is the price being offered to be paid for purchase of the product. The rate
has to be according to the unit of measure of the product in the PO. Meaning the rate cannot be
per litre for a purchase which could be in meters. Normally the rate specified in a Purchase
Order is applicable for the quantity of purchased specified in the PO. Rates can vary depending
on the market conditions of demand and Supply. To avoid a major variance in the rate of the
product. Some companies would insist on a rate card applicable for a given period of time (say
one year). Rate can be based on the quantity purchased. Some suppliers may offer a lower rate
once the purchase quantity exceeds a given number. For example: The order Quantity is for 1000
meters of cloth. The order might specify as follows. Rate for the first 500 meters of cloth is @ Rs.
25 a meter. The next 500 meters would be @ Rs. 24 a meter.

(viii) Value: Any purchase order would have a maximum value for the order. This is the sum of all
the quantity of products ordered multiplied by the corresponding rate at which the order is placed.
This is then compounded by adding all the applicable taxes which are statutorily required to be
charged for the respective product sale.

(ix) Applicable taxes: Normally when a PO is raised for a product, it may attract multiple taxes
such as excise duty and VAT. . This tax could vary depending on the product and its tariff
classification. These tax ratres applicable may be changed by the statutory authorities. Hence
some companies resort to the practice of mentioning applicable taxes in the PO. Normally the
taxes applicable and the Rate would be specified on the PO.

(x) Terms of Payment: A PO might have certain terms of Payment. These are the governing
guidelines for releasing the payment to the supplier of goods / services . Here are some
examples :
50% Advance along with Purchase Order order and balance upon completion of
delivery as per PO
100% payment against delivery as per PO
100% payment after 30 days from delivery as per PO and receipt of commercial invoice
10% advance against PO and balance after 45 days from date of delivery as per PO
Terms may never be the same from order to order or supplier to supplier. However, what is
important to understand is that it must capture the terms discussed without any ambiguity.
For example: Godhavari Enterprises made an advance payment to Smart Apparels for procuring
the materials. If the PO is analyzed, it would have mentioned advance payment in the Terms of
payment space.
.

(xi)Terms of Delivery: Terms of delivery would normally mention the mode of transport to be
used and the insurance pattern for the supply. This also includes the terms of who would bear the
freight. The terms used for freight are:
FOB: Free on Board, means the freight is borne by the supplier till the materials are supplied till
the nearest port or railway station at the point of origin. For example when the supplier quotes his

2012 by ePalmleaf ITES Pvt Ltd - All rights reserved.
price as FOB Mumbai it would mean that the supplier would incur all costs of transporation of
goods up to Mumbai Railway station or Mumbai Airport. Thereafter, the purchaser would have to
take care of the freight charges from Mumbai and also pay for the insurance.

CIF : Means that the price quoted by the seller includes insurance and freight up to the named or
agreed destination which could typically be the purchasers warehouse or nearest delivery point
such as the Airport or Railway station.

FOR: Free on Rail, means the supplier bears the freight including the rail mode of transport.
Ex-works: In this mode, the Purchaser has to bear the total freight as the goods are sold from
the factory of the supplier.
Insurance normally goes along with freight. The party who bears the freight normally covers
insurance for the products.

(xii) Lead Time for Delivery: All Purchase Orders have to necessarily specify the time by which
the materials are required. Depending on the product lead time could vary. Some off the shelf
products are available immediately. Some others have to be manufactured by the supplier. When
the PO specifies Lead time, it becomes the responsibility of the Supplier to adhere to the time
frame and ensure supplies happen within the committed time.

(xiii) Delivery address (shipment address): The Purchase order has to specify the address
where the products have to be supplied.

(xiv)Approvals: All Pos have to be approved for all the terms by the approving authority of the
company. The approving authority invariably would be the head of the materials department.


(B) Material Receipt Report (MRR): This is a document prepared by the Stores department of
the business which received the materials from the suppliers. Normally whenever materials are
received from suppliers, they are accompanied by the delivery challan / excise gate pass, of the
supplier and the invoice or bill raised by the supplier. In some cases the invoice could double up
for the delivery challan.
Inward of Material: When the materials are received by the stores department, they are
supposed to inward the materials and keep them in the materials inward bay allotted in
the stores. These are conceptually being held by the company in trust and till they are
accepted, the company does not own the materials. Then a document is made for the
inward of materials known as the Materials Receipt Report (MRR)
The MRR has to necessarily detail the following information in order to make sense.
Normally it should capture all the details namely product description / suppliers part
number / Organisations part number, Quantity / unit of measure etc.
(i) Quantity inward: This is the quantity mentioned on the suppliers document
may it be a delivery challan or an invoice. This is mentioned product wise as
each product received from the supplier would have different quantities.
(ii) Quantity Received: Apart from quantity inward, it may be relevant to capture
the quantity received as there could be discrepancy in the quantity as mentioned

2012 by ePalmleaf ITES Pvt Ltd - All rights reserved.
in the Delivery note of the supplier and the physical quantity received. This is
captured, part number-wise.
(iii) PO reference: It is mandatory to mention the Purchase order reference
which entitles the supplier to supply the materials. If this is not mentioned, it
would be difficult to match the other terms and make payment to the supplier.
Sometimes the supply of materials might be more than the quantity ordered.
Then it may be relevant to go for authorization of the approving authority to make
necessary corrections on the purchase order in order to receive the materials.
(iv) Supplier Invoice / Delivery note reference: The Materials Receipt Report
has to necessarily have the reference of the Supplier Invoice / Delivery note.
Normally the Supplier sends a copy of the invoice to the Accounts department
which has to be matched with the MRR. Hence a reference of the invoice number
on the MRR would do good to enable matching by the accounts department.
(v) Quantity inspected: Inspection of the goods / products is done on a batch
mode and could also depend on the current requirement of the production
department. Not necessarily all the goods received might be inspected at once.
This process ensures a mention of the quantity considered for inspection on the
MRR.
(vi) Quantity accepted: After inspection by the Quality department the Quality
department certifies the materials which are complying with the specifications /
requirements of the organization. Those products not complying with the required
specifications are rejected and those which are complying with the specifications
are accepted. The quantity accepted is taken as a record on to the stores
department and the MRR with Accepted Quantity is sent to the Accounts
department for making payment to the supplier of goods.
(vii) Part acceptance (supplementary document): In case there is a
part acceptance and the balance quantity are given for correction, there
may be a need for a supplementary document to be raised for the
balance quantity given for correction / rework. This document would
carry the original MRRs reference and invariably have the same number
with an added suffix
(viii)Re-inspection: If part quantity is rejected and given for correction /
rework, these are once again given for re-inspection by the Quality
department. The Quality Department once again checks for conformance
with the specifications and either accept the materials in full or part. IF
part acceptance is done, then the balance quantity not accepted is
rejected.
(ix) Rejection: The rejected quantity numbers are mentioned in the
column specified for Rejection. These materials have to be kept
separately and dispatched back to the supplier through a valid dispatch
document.

(C)Supplier invoice: An invoice is raised by the supplier of materials. Many a times this invoice
serves as the document for movement of goods from the suppliers premises to the purchasers
premises. The invoice is primarily raised from the business office of the supplier. Some suppliers
raise a document named invoice cum-delivery challan. If this document is raised by the supplier,

2012 by ePalmleaf ITES Pvt Ltd - All rights reserved.
it is normally raised from the godown which ships the materials. The invoice is the document used
by the purchaser to make the payment for the materials received. Hence the invoice should
contain references which help the purchaser to identify the invoice with the material supplied by
him, and relate this with the purchased order raised by the purchaser.
(i) PO reference: To ensure the materials supplied are as per the terms and conditions /
specifications mentioned in the purchased order sent by the purchaser, it is mandatory
for the supplier invoice to have the PO reference. This reference enables the purchaser
to check the parameters which are relevant before initiating for payment.
(ii) Delivery challan reference: To enable the purchaser identify the time & date of
materials supply, the invoice has the reference of the delivery challan (the document sent
along with the shipment of materials). This process helps the purchaser to identify the
particular shipment with the said invoice. Since there can be multiple shipments for the
same materials, this process of relating to the delivery challan ensures the correct
materials are identified with the given invoice.
(iii) Quantity supplied: The quantity of materials supplied as mentioned in the delivery
challan and tying up with the physical supply is mentioned in the supplier invoice to
enable easy reference. This quantity cumulatively for all the supplies pertaining to a given
purchase order should not exceed the quantity on order unless there is a written approval
or amendment to the Purchase order. Hence it is important to note the quantity supplied
on a cumulative basis as a record to check with the ordered quantity.
(iv)Rate: Rate is the agreed rate for the materials referred to the unit of measure as
determined in the purchase order. The rate has to be in agreement with the agreed rate
else the purchaser would not make the payment.
(v) Value: Value in the Supplier invoice is the total value of the materials supplied. This is
based on the multiplication of the quantity supplied with the applicable rate of the
materials supplied. These are mentioned individually for each material.
(vi) Applicable taxes: Depending on the category of the product, the number of taxes
and tax rates could vary and different tax rates may be applicable for each category. The
applicable tax and the percentage of tax has to be mentioned separately in the
document. For example: Material (1) attracts a VAT of 4% materials two and three attract
a VAT of 12%, then these are calculated separately and shown as two rows in the invoice
(Vat @ 4% __________; VAT @ 12% __________ etc.)
(vii) Ship to address: Invoices may be sent to the accounts department of an
organization which may have two or three factories which may receive the materials. To
enable the purchaser identify the materials with the invoice, the shipment address (where
the materials had been shipped to is mentioned on the invoice. This helps the purchaser
to identify the exact material supply with the referred invoice.

Bill Matching
Match Supplier Invoice with MRR: The first process in the bill payment exercise is
matching the Supplier invoice and the Material receipt report. This is done with the
reference of the dispatch document from the supplier or the delivery challan reference.
Since the Supplier invoice and the Material Receipt Report contain the delivery challan
reference, the invoice and the MRR are matched and attached together.
o Check for quantity supplied: The second step is to check for the agreement
of the supplied Quantity in the Material Receipt report and that mentioned in the

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Supplier invoice. This check is to ensure the quantity reference is correct and
thee is no over / under billing from the Suppliers side.
o Check acceptance of materials: The next step is to check if the quantity
received has been accepted by the quality control department. In some cases if
the materials received is not matching with the specifications required, these may
be rejected. If some quantity has been rejected and offered for re-work, check for
supplementary Materials Receipt report with the same reference wherein the
rejected quantity might have been accepted after rework. The acceptance of
materials is the primary criteria for making a payment to the supplier.
Match Supplier Invoice with PO: This process involves matching the supplier invoice
and the Purchase order. To enable matching of the supplier invoice with the relevant
purchase order, all supplier invoices would have the PO reference.
o Check for quantity supplied: First Step is to check for quantity supplied as per
invoice and the ordered quantity. The quantity supplied should not exceed the
ordered quantity. If it exceeds, then there needs to be an escalation and an
approval / amendment of the purchase order to capture the revised quantity.
o Check Rate: The second step is to check if the rate mentioned is in order and in
line with that agreed in the Purchase order.
o Check for discounts if any: Some times the rate could vary beyond a particular
quantity purchased and there could be some discounts applicable for certain
slabs of purchases. Check if these discounts if any have been applied in the
Invoice.
o Check unit of measure: Check if the unit of measure is in line with that
mentioned in the PO.
o Check for relevant taxes: Check for all applicable taxes and the method in
which the tax is charged on to the invoice. Check calculations and see they are in
order.
Prepare Purchase Journal: After performing the three way matching between Purchase
order / Supplier Invoice and the Materials Receipt report, the next step is to book a
purchase journal.
o Accepted Quantity
Check if it is within PO Quantity
If there are part deliveries
Check within Balance Quantity
Any deviations seek PO amendment
o PO Rate
Account only with PO Rate
Any deviations
Seek PO amendment
o Attach Customer Invoice with MRR
o Arrive at the value of purchase based on quantity accepted and the agreed rate
for purchase, apply the applicable taxes and calculate. On arriving the value of
purchase, the purchase journal is passed in the books of accounts.
o Pass entry in the Books of account.
Debit Purchases

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Credit Supplier

o Payment voucher: Payment Voucher is a document raise while making the payment to the supplier the
agreed consideration for the value of materials received. This is prepared on the date of payment
Normally all purchases of materials have a credit period which could vary between Zero days to sixty
days depending on the nature of the material and the availability of the materials. Materials which are
scarce have a very low credit period and materials which are available in plenty have a longer credit
period. This credit period helps the purchaser to convert the materials into finished goods and sell in the
market place. Credit obtained from supplier also goes with the credit worthiness of the purchaser. If the
purchaser is a stable business and has a good reputation in the market place, the suppliers would be
willing to give more credit. If the purchaser has a bad reputation in the market place, the suppliers may
not give any credit to the purchaser. The credit period is the basis for initiating the payment. The payment
for any purchase is released after the credit period on the due date.
Check for Due date for payment:
Check PO terms of payment: In certain cases the Po might have clauses such as a
fixed percent of the payment is done in advance and the balance after a credit period.
This advance payment of a fixed percentage (say 10% or 20%) is done to enable the
supplier buy his raw materials. IT is important to check whether any advance has been
paid for the current purchase journal which has to be paid on its due date. If advance had
been paid, the advance amount has to be deducted which making the current payment.
On Due date
Check Fund Availability
Check for advance payments if any
Advice for payment to be made for
Prepare Cheque / NEFT advice
Send the cheque for approval
Account Payment
o Debit Supplier
o Credit Bank
o Reporting
Todays outstanding
Weekly payables
Monthly payables
Overdue payables
Part payments (reasons)
Milestone based payments