All companies should have policies regarding document retention and requirements relating to the purchasing cycle. Vital bits of information are created from the time when an order is placed to the time when the payment is issued. This knowledge should be maintained, stored, and utilized for the maximum benefit of the company. Because there are multiple ways to purchase an item, the documentation may vary between the two main methods: the voucher approval process or the purchase order process.
Voucher Approval Process
The approval process for a voucher should be a required internal control to manage what gets paid. The initiating document is an invoice issued by another company. This is essentially a request for payment. However, because of the possibility of unauthorized orders, incorrect billing prices or quantities, or invoice errors, the invoice should be manually approved. This approval should be documented, attached to the invoice digitally or physically, and retained with a copy of the payment to be issued. The approval should be written or typed, dated, and include the signature of initials of the employee responsible for the charges.
Purchase Order Process
The purchase order approval process is opposite of the voucher approval process. Instead of waiting to approve an invoice, a prospective purchase is approved up front. For this reason, there is different documentation used when a purchase order is issued. First, a purchase requisition must be issued to the purchasing department. A purchase requisition is a formal submission asking for a purchase order to be created. To be considered, the purchase requisition must contain a price quote, vendor information, accounting coding, and substantiation backing the purchase. If all information is approved, a purchase order is created and sent to the vendor. A purchase order outlines the agreed-upon items, prices, and contract terms for the purchase. Once the goods have been received, the department responsible for inventory management creates a receipt in the accounting system. This receipt details what items were received on the purchase order. Meanwhile, the accounts payable system receives invoices from the vendor. The accounts payable department must match the invoice to the purchase order and receipt prior to issuing payment to the vendor. This matching process is vital to ensuring the accuracy of the order; this is the stage when payments are made for items that were ordered and received.
Reasons to Store Documentation
Documentation serves purposes for internal and external parties. A small business would not pass an external audit without having substantiation backing the transactions that have been booked. Insurance companies may require substantiation regarding the ownership of assets. Financial institutions may need to see debt agreements or proof of the amount of debt being carried on financial statements. Keeping financial documents can be useful for detecting errors, planning future operations, and looking back at historical data.
Determining the Best Process
A small business typically employs the voucher approval process and the purchase order process to make purchases. In general, the purchase order process should be used for larger purchases. It is typically used for purchases of assets to ensure specifications and price are documented. Because the invoice approval process requires less documentation, it is more convenient. However, because more of the process occurs once the invoice has been received, there is a higher risk of failing to pay the vendor on time. Although paying without purchase orders allows a company to be more flexible, both processes should be accompanied by strong documentation policies.