USA 2 way match Journal Entries

[Accountesss]

For two way match with a purchase order:

1. Purchase order created (No financial impact of JE)
2. Invoice is received and applied
DR to Expense
CR to Accounts Payable
3. Payment made:
DR Accounts Payable
CR Cash
4. Any open POs at the end of the month that don't have invoices received are accrued under accrued expenses.

Could someone tell me if the above is correct?
If it is a two way match, why does it need to go DR expense and CR AP. Can it not go DR Expense and CR Cash straight away? Or will step 3 only happen when the payment run is processed (in this example once a week on Friday)

 

[Fidget]

Yes, that's about right. With finance systems, what tends to happen is:

* Purchase order issued - no effect on the ledger (although the transaction is sitting in the background)
* Goods receipted on system - transaction sitting in the background posts to ledger creating DR expense and CR to supplier account.
* Invoice received and matched - DR to Supplier account to clear off the debt, CR to bank account to recognise payment - generally when a set payment run is done.
* Receipted purchase orders that have not been invoiced are accrued automatically.

Most finance systems (that I've used anyway) have some form of 'commitments' ledger where you can see all transactions that haven't been receipted yet.

The payment can't go directly to cash because you'd be left with a supplier account saying you owe that supplier money, when you've actually paid it.

 

[Accountesss]

Thanks for your response!

I have a few followup questions. In this example, because it is a 2 way match and not a 3 way match there is no good receipt recorded. Therefore, when the invoice is received would it be the first journal entry: DR expense and CR Accounts Payable Then it will sit there until close to the end of the payment terms t(o ensure we keep our money for as long as possible..say 45 days) then become part of the payment run and CR Accounts Payable and DR Cash.

Since there is no receipt, the Purchase Orders will not be received. If it is just an open purchase order where nothing has been received (service, product or invoice) do these still get accrued each month for accrued expenses?

 

[Fidget]

1. Yes, that's about right. In the real world, most businesses will pay invoices due to be paid towards the end of the due date - generally 30 days.

2. If you raise a purchase order and then pay it outside of that, then it would sit there as an auto accrual regardless that it's been paid. The point of having purchase orders in the first place is to stop the practice of purchasing without any record of it until an invoice turns up. A lot of companies won't pay an invoice unless it comes with a quoted purchase order number. An added benefit of that is that it is harder for the criminal society to send in an invoice due for payment, and it being subsequently paid.