2017-03-15 00:00:00BookkeepingEnglishUnderstand the purchasing cycle and apply quality controls and accurate recordkeeping to ensure timely and efficient operations while...https://quickbooks.intuit.com/ca/resources/ca_qrc/uploads/2017/06/worker-inventories-newly-purchased-supplies.jpgUnderstanding and Accounting for the Purchasing and Procurement Cycle

Understanding and Accounting for the Purchasing and Procurement Cycle

2 min read

The procurement cycle is a critical part of a company’s operations that can cover a wide range of departments and processes, including ordering, receiving, inventory management, and recordkeeping. A strong grasp of the many steps of this process and implementing proper accounting and controls can greatly impact a company’s bottom line.

Identifying the Company’s Needs

The procurement process begins with identifying a need within the organization. This need can be for anything from physical goods such as parts and supplies, or services such as programming or repairs. Identifying these needs includes specifying the features and quantities the company requires, and these specifics help fill out the internal requisition, which begins the paperwork trail for the procurement cycle.

Using Purchase Orders

With a clear picture of the goods or services the company needs, the company can then begin to shop for suppliers, contact vendors, and negotiate prices. These negotiations result in the terms stated on the purchase order, which lays out the goods or services the buyer is ordering, including the quantities and rates. A purchase order is useful for both the buyer and supplier to keep on file and serves as a contract of your purchase agreement. You can typically fax, mail, email, or otherwise electronically transmit a purchase order, or you can create an automated process to help you eliminate errors and reduce processing lags to increase the overall timeliness of the procurement cycle.

Receiving Goods

Once your company receives shipped goods, it can inspect them and determine whether to accept the order. Once your receiving department accepts the order, your company agrees to pay according to the terms on the purchase order, but you may be able to request a credit on your invoice for any damaged or missing goods.

Invoicing and Payment

When you receive the invoice, you can use the purchase order to verify billing amounts and address any differences with the supplier. If you’re procuring physical goods, you can also compare the packing or receiving list to ensure the invoice and order are both correct. The purchase order, packing documents, agreements, and invoice are all useful documents for reconciling your records, and keeping good records helps you when it comes time to file taxes. It can also help your company track warranties, manage inventory, and plan future purchases. There are a wide range of possible ways to remit payment, including cash, cheques, bank deposits, electronic transfers, or extensions of credit. Paying the invoice within the payment deadlines and adhering to agreed-upon payment methods helps your company ensure a positive ongoing relationship with your suppliers.

Internal Controls

Separating duties throughout this process helps you maintain compliance with regulations and preserve your company’s bottom line. Ensuring different people place and receive orders, for example, helps to prevent loss through negligence or fraud. By verifying invoices against purchase orders and implementing layered approval processes, you can prevent unauthorized purchases, minimize erroneous charges, and keep costs down. Position your company for cost savings by understanding the different stages of the procurement cycle and keeping accurate records throughout the process of requisitioning, ordering, receiving, and settling invoices. Combining these records with automated and electronic processes takes the hassle out of tax preparations and improves the timeliness throughout each stage of the procurement cycle.

References & Resources

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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