Import Export Documents

Given below are the documents generated during customs process:

Purchase Order - Export

The international purchase order is the confirmation you require from the buyer that there exists
a commercial deal and that you should prepare and ship the goods accordingly. The purchase
order will include all details of price, transport and payment agreed between you and the buyer,
as well as some of the buyer's concerns. Buyer may also request you to include the statutory
conditions/declarations of his country. For example, his customs department may require a
certificate of origin issued by a Chamber of Commerce to be presented for customs clearance.

Purchase Order - Import

You can use the Create purchase order form to create an import order for a vendor. In most of the
ERP’s you need to select the Import Order check box or use some field to specify that the
purchase order is for import purposes. In some systems, if the vendor that you selected is a
foreign vendor and the Purchase order is selected in the Purchase order field, the Import order
check box is selected automatically. The Customs duties' Tax Calculations and associated tax
components are defaulted to import POs based on some predefined parameters such as Supplier
Category or Benefit ID.

Proforma Invoice

Proforma Invoice is the initiating document of the international transaction. Once the importer
receives your pro forma invoice, he will consider it as final commitment to the transaction. He
may need the pro forma invoice to either obtain a foreign exchange allocation (applicable in
some countries), for making application for an import permit, or for applying application for the
establishment of a documentary credit. You must ensure that the information given in the pro
forma invoice is complete, clear and concise., information lacking in this document will be
absent in later payment and transport arrangements, which could ultimately lead to problems in
the processing of the order.

Proforma Invoice - STP / EHTP

STP bonded warehouses remain under customs control. The materials entered in to a bonded
warehouse is obtained without paying any duty whether import or excisable. Under an STP
scheme, all materials are exempted from customs and excise duties including the materials
sourced locally. Hence, a control on such dutiable materials is required from customs and excise
authorities as such materials are only used for the manufacture and export of STP units subjected
to approval, for every consumption. STP units can import all capital goods those required for
creating STP infrastructure unless the same are in the prohibited list. STP units are allowed to
import equipment on outright purchase or loan or free cost or lease basis after applying for
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import certificate in the prescribed format. To apply for import certificate the unit needs to attach
“Proforma Invoice” which should necessarily state the name and location of STP unit and the
name of supplier and country of origin.

Import Invoice

A commercial invoice is a document used in foreign trade. It is used as a customs declaration

provided by the person or corporation that is exporting an item across international borders.
Although there is no standard format, the document must include a few specific pieces of
information such as the parties involved in the shipping transaction, the goods being transported,
the country of manufacture, and the Harmonized System codes for those goods. A commercial
invoice must also include a statement certifying that the invoice is true, and a signature. A
commercial invoice is used to calculate tariffs, international commercial terms (like the Cost in a
CIF) and is commonly used for customs purposes. When the accounting unit is an importer, it is
referred to as Import Invoice.

Export Invoice

A commercial invoice is a document used in foreign trade. It is used as a customs declaration

provided by the person or corporation that is exporting an item across international borders.
Although there is no standard format, the document must include a few specific pieces of
information such as the parties involved in the shipping transaction, the goods being transported,
the country of manufacture, and the Harmonized System codes for those goods. A commercial
invoice must also include a statement certifying that the invoice is true, and a signature. A
commercial invoice is used to calculate tariffs, international commercial terms (like the Cost in a
CIF) and is commonly used for customs purposes. When the accounting unit is an exporter, it is
referred to as Export Invoice.

Import Certificate

Import Certificates are a proposed mechanism to implement balanced trade, and eliminate a
country's trade deficit. An import certificate, (ICs) represent the right to import a certain dollar
amount of goods into the country and is issued to exporters in an amount equal to the dollar
amount of the goods they have exported. Import certificate can be utilized once. Similarly, to
control imports, some governments prescribe that the import can only be done against valid
import certificates for certain category of goods.

Bill of Entry

Bill of Entry is a declaration by an importer or exporter of the exact nature, precise quantity and
value of goods that have landed or are being shipped out. This is usually prepared by a qualified
customs clerk or broker and it is examined by customs authorities for its accuracy and
conformity with the tariff and regulations. The Bill of Entry (BOE) worksheet is created from
import PO or another BOE in typical ERP system. When you save a new BOE, actual customs
duties are determined and calculated for the BOE. When the imported goods arrive at customs,
the BOE is submitted to the customs authorities along with other shipping documentation. You
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update the BOE based on the assessment by customs officials. Once the BOE is in Assessed or
Closed status, no changes can be made and customs duties will not be recalculated in the system.

Airway Bill (HAWB / MAWB) - Import & Export

Air Waybill (AWB) or air consignment note refers to a receipt issued by an international airline
for goods and an evidence of the contract of carriage. There are several purposes that can be
served by an airway bill, but its main functions are Contract of Carriage; Evidence of Receipt of
Goods; Freight Bill; Certificate of Insurance and aids Customs Declaration. International air
waybills that contain consolidated cargo are called master air waybills (MAWB). MAWBs have
additional papers called house air waybills (HAWB). Each HAWB contains information of each
individual shipment (consignee, contents, etc.) within the consolidation. International AWBs that
are not consolidated (only one shipment in one bill) are called simple AWBs. A house air
waybill can also be created by a freight forwarder. When the shipment is booked, the airline
issues a MAWB to the forwarder, who in turn issues their own house air waybill to the customer.

Bill of Lading - BL – Import & Export

A bill of lading (sometimes abbreviated as B/L or BOL) is a document used in the transport of
goods. It serves several purposes in domestic and international trade. A bill of lading is generated
by a shipper, details a shipment of merchandise, gives title to the goods, and requires the carrier
to deliver the merchandise to the appropriate party. Because the bill of lading represents title to
the goods detailed upon it, it can be traded in much the same way as the goods may be, and even
borrowed upon if desired. This is a very important and common document used in export and
import trade globally and for letter of credit and Documentary Collection transactions, it is
important to retain title to the goods until the transaction is complete. This means that the bill of
lading remains a vital part of international trade.

Packing List – Import & Export

In Exports/Imports Packing list is also a commercial document. Packing list shows how the
material was packed. It is an itemized list of articles usually included in each shipping package,
giving the quantity, description, and weight of the contents. Prepared by the shipper and sent to
the consignee for accurate tallying of the delivered goods.

High Sea Sale Agreement & Invoice

High Sea sales (HSS) is a sale  carried out by the carrier document consignee to another buyer
while the goods are yet on high seas or after their dispatch from the port/ airport of origin and
before their arrival at the port / airport of destination. Hence, high sea sales is a sale made, of a
consignment, while its in sea only. HSS is accepted under the import trade control regulation.
HSS contract/ agreement should be signed after dispatch of goods from origin & prior to their
arrival at destination. The agreement should be on stamp paper. On concluding the HSS
agreement, the B/L should be endorsed in favor of the new buyer.

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CE Certificate - Import

CE marking is a declaration by the manufacturer that the product meets all the appropriate
provisions of the relevant legislation implementing certain European Directives. CE marking
gives companies easier access into the European market to sell their products without adaptation
or rechecking. The initials "CE" do not stand for any specific words but are a declaration by the
manufacturer that his product meets the requirements of the applicable European Directive(s).
The CE Mark (officially CE Marking) is a mandatory conformity mark on many products placed
on the single market in the European Economic Area (EEA). By affixing the CE Marking, the
manufacturer, its authorized representative, or person placing the product on the market or
putting it into service asserts that the item meets all the essential requirements of all applicable
EU directives and that the applicable conformity assessment procedures have been applied. For
some products this can only be achieved by using an external test house which evaluates the
product and its documentation, however, in about 90% of cases it can be achieved by a self-
certification process.

ARE - 1 Form

FORM A.R.E. 1 is an application for removal of excisable goods for export by

(Air/Sea/Post/Land) whether without payment of duty or on payment of duty with a claim for
rebate submitted in excise.  Both the original & duplicate copies, duly endorsed by custom is
required to be submitted to the Excise authority (division office, where bond had been executed.)
ARE-1 copies are not for buyer or seller. All the four copies of ARE1 go to the excise
authorities. Fifth optional copy may be retained by the manufacturer exporter for their records.
Invoice is prepared for commercial documents.

SEZ/EOU/EHTP/STPI/BTP/FTWZ Approval letters

The term SEZ that stands for Special economic zones in which the various units like
EOU/EHTP/STPI are located which mainly process goods and services for export. Supplies to
SEZ are exempted from payment of duty. All clearances to SEZ/EOU/STPI/EHTP are treated as
deemed export for the DTA unit.  These units should have approval letters to qualify as special
units.

Procurement Certificate

For the import of duty free capital goods or raw materials, unit has to make an application to
Customs along-with copy of invoice duly attested, packing list, and Import certificate from STPI
in case of STP, HTPI units, IGMS & Airway Bill or Bill of lading. The department will issue a
serial numbered Procurement Certificate for duty free imported goods. The EOUs and
STP/EHTP/EPZ/SEZ units obtain a procurement certificate for clearing goods duty-free under
the relevant exemption notifications at the port of import/airport etc.

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Re Warehousing Certificate

Import of goods are allowed without payment of duty on the basis of the particulars in the
Procurement Certificate, the fulfillment of the conditions of duty exemption  under EOU will
become complete only when Re-warehousing Certificates (RWCs) are received from the
concerned jurisdictional Central Excise Authorities.  Once after arrival of goods at STP or EOU
premises, an intimation regarding arrival of goods at STP / EOU unit is effected to EOU/STP
customs authorities. The EOU / STP authorities issues re-warehousing certificate after satisfying
on arrival of such goods on physical verification of goods at STP / EOU premises. Necessary
bond registers have to be maintained for each entry or removal of goods.

Redemption Letters

Redemption letters are issues by DGFT so that the advances and Bank Guarantees etc. given at
the time of obtaining EPCG licenses can be redeemed. Once the redemption letter has been
issues the importer can take the same to the authorities for cancellation of bond/BG/LUT.

Refund documents / DBK Applications

Under Duty Drawback Scheme (DBK) relief of Customs and Central Excise Duties suffered on
the inputs/components used in the manufacture of goods exported is allowed to Exporters. The
admissible duty drawback amount is paid to exporters by depositing it into their nominated bank
account. Section 75 of the Customs Act, 1962 and Section 37 of the Central Excise Act, 1944,
empower the Central Government to grant such duty drawback. Customs and Central Excise
Duties Drawback Rules, 1995 have been framed outlining the procedure to be followed for the
purpose of grant of duty drawback (for both kinds of duties suffered) by the Customs Authorities
processing export documentation.

Shipping Bill – Export Promotion Copy

Export Promotion is a scheme to promote the export of some specific articles (metals, etc.)
where you get subsidy from the government at an prescribed rate known as duty drawback.
Please see the definition of duty drawback in previous paragraph. Export Promotion copy may be
defined as " the document stating the calculations of drawback with rates of drawback & the
weight/value of article (whichever is lower) mentioned on it. It is prepared only if we have to
claim the drawback on any specified invoice or export bill. The prescribed checklist together
with the supporting export documents and challan evidencing payment of duty and/or cess, if
any, shall be presented to the proper officer of customs for making an order permitting clearance,
for loading of goods for exportation, after examination of the export goods if so required. After
making an order under regulation 5, the proper officer shall generate the original (customs copy),
exporter’s copy, exchange control copy and the export promotion copy of shipping bills. The
original (customs copy) of the shipping bill and the checklist shall be retained by the proper
officer. The exporter’s copy, exchange control copy and the export promotion copy of shipping
bill shall after suitable endorsements, be handed over to the authorized person.

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Show Cause Notice / Demand Notice

When duty has not been levied, short levied, or erroneously refunded or interest not paid, part
paid or erroneously refunded, a notice demanding the said duties/interest is required to be issued
by the Department. The demand notice or show cause notice should give a clear description of
the allegations and charges against the persons concerned. It should give particulars of facts,
which furnish the reason for issue of the demand notice or show cause notice. The show cause
notice must disclose all the materials/evidence relied upon in making the allegations. An
opportunity of personal hearing must be offered in the Show cause notice. The show cause notice
must give full designation and address of the authority to whom the written submission is to be
made.

TR6 Challan

In India, TR6 challan is used to pay the central excise/service tax/customs duty and some other
types of statutory dues. Whenever money is deposited into PLA then the TR6 challan should be
updated.

Certificate of Origin

A Certificate of Origin (often abbreviated to C/O or COO) is a document used in international

trade. It is a printed form, completed by the exporter or its agent and certified by an issuing body,
attesting that the goods in a particular export shipment have been wholly produced,
manufactured or processed in a particular country. The “origin” does not refer to the country
where the goods were shipped from but to the country where they were made. The certificate of
origin must be signed by the exporter, and, for many countries, also validated by a Chamber of
Commerce, and in the case of certain destination countries by a consulate. Chambers of
Commerce offer certificate of origin services, amongst other organizations. Companies may
consult the Chamber Directory on the World Chambers Network, the official global portal of
Chambers of Commerce dedicated to electronic international trade, to find their nearest chamber
who may offer this service.

Certificate of Quality and Quantity / Pre Shipment Inspection

Pre-shipment inspection, also called pre-shipment inspection or PSI, is a part of supply chain
management and an important and reliable quality control method for checking goods' quality
while clients buy from the suppliers. After ordering a number of articles, the buyer lets a third
party control the ordered goods before they are dispatched to him. Normally an independent
inspection company is assigned with the task of the PSI, as it is in the interest of the buyer that
somebody not connected with the deal in any way verifies the amount and quality. This way the
buyer makes sure, he gets the goods he paid for. The process involves, checking the total amount
of goods and packing, controlling the quality and/or consistency of goods, checking of all
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documentation, including test reports, packaging list, and verifying compliance with the
standards of the destination country (e.g. ASME or CE mark). After the inspection, a certificate
of quality and quantity is issued.

Certificate of Insurance

Certificate of insurance is a document issued by an insurance company. It certifies that an

insurance policy has been bought, and shows an abstract of the most important provisions of the
insurance contract. In marine insurance (where cargo is insured against a floating insurance
policy), COI serves to assure the consignee that insurance is in effect for the goods in transit and
a proper policy will follow. This is also called insurance certificate. This might be required from
the buyer before the shipping of the goods take place.

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Accounts Payable System
Given below are the key requirements from any automated world class accounts payable system:

Flexibility:

Payables system should provide flexibility for managing and streamlining invoice and payment
processing. The flexibility is required in the areas of account structure, multiple calendars,
multiple currencies, multiple bank accounts, multiple payment terms and how the system helps
entering the information by defaulting linked information from the master data.

Accurate Invoice Processing:

Payables system should provide controls and automations to improve the efficiency of invoice
processing and simultaneously help ensuring the accuracy of payables information. Some
automation features or best practices are automatically matching an invoice to a purchase order
by providing the purchase order number. Defaulting the accounting details and other information
based on the matched purchase order.

Invoice Approvals:

As controllership and sox requirement the payable system should support two-, three- and four-
way matching of purchase orders, invoices, receipts, and requester acceptance documents.
Further it should provide approval mechanisms to ensure segregation of duties.

Multiple Payment Types:

System should provide capability to handle every form of payment, including manual payments,
wire transfers, bank drafts, electronic funds transfers, and automatic checks. Further these
payments should automatically or manually reconcile with the bank statements.

Supplier Interface:

System should enable resolve business issues quickly by providing immediate and accurate
responses to supplier inquiries. Ability to view Invoice and Payment status information together
to take informed decisions and have a meaningful conversation with the supplier.

Additional Information:

Ability to record detailed information about suppliers, including their purchasing, payment, and
invoice processing preferences, flexible address formatting for global operations.

Electronic Data Interchange (EDI):

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This allows exchanging payables data with external parties like banks and suppliers. Ability to
use EDI drastically reduces many manual steps.

Pay on Receipt:

This is a financials feature that automatically creates supplier invoices based on receipts and
purchase orders information. An advanced feature will automatically create matched invoices,
automatically approve invoices and then make EDI or other electronic payments to the supplier.

Open Interfaces:

Ability to bring procure to pay data from other systems to the payables system. 

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Accounts Payable Documents
The documents that are generated during the accounts payable process are listed below:

Purchase Order:

A purchase order (PO) is a commercial document and first official offer issued by a buyer to a
seller, indicating types, quantities, and agreed prices for products or services the seller will
provide to the buyer. Sending a purchase order to a supplier constitutes a legal offer to buy
products or services. Acceptance of a purchase order by a seller usually forms a contract between
the buyer and seller, so no contract exists until the purchase order is accepted. It is used to
control the purchasing of products and services from external suppliers. Creating a purchase
order is typically the first step of the Purchase to pay process in an ERP system.

Invoice

An invoice or bill is a commercial document issued by a seller to a buyer, indicating the

products, quantities, and agreed prices for products or services the seller has provided the buyer.
An invoice indicates the sale transaction only. Payment terms are independent of the invoice and
are negotiated by the buyer and the seller. Payment terms are usually included on the invoice.
The invoices are received during the buy- to- pay process from the supplier and can be for both
the products and the services.

Commercial Invoice

A commercial invoice is a document used in foreign trade. It is used as a customs declaration

provided by the person or corporation that is exporting an item across international borders.
Although there is no standard format, the document must include a few specific pieces of
information such as the parties involved in the shipping transaction, the goods being transported,
the country of manufacture, and the Harmonized System codes for those goods. A commercial
invoice must also include a statement certifying that the invoice is true, and a signature. A
commercial invoice is used to calculate tariffs, international commercial terms (like the Cost in a
CIF) and is commonly used for customs purposes.

FIRC - Foreign Inward Remittance Certificate

Foreign Inward Remittance Certificate (FIRC) is a certificate issued by the bank to the account
holder as a proof of inward remittance to India. Most of the statutory authorities use this
document as a proof that an individual has received a payment in foreign currency from outside
the country.

Invoice Voucher

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A voucher is an accounting document representing an internal intent to make a payment to an
external entity, such as a vendor or service provider. A voucher is produced usually after
receiving a vendor invoice, after the invoice is successfully matched to a purchase order. A
voucher will contain detailed information regarding the payee, the monetary amount of the
payment, a description of the transaction, and more. In accounts payable systems, a process
called a "payment run" is executed to generate payments corresponding to the unpaid vouchers.
These payments can then be released or held at the discretion of an accounts payable supervisor
or the company controller.

Debit Note

A document used by a purchaser to inform a vendor of the quantity and dollar amount of goods
being returned, and requesting that the dollar amount be returned to the purchaser. A debit note is
often used to return goods on credit. The vendor then issues a credit note to the purchaser
indicating that the goods have been received, and that the purchaser will not have to pay for
them. This is also referred as "debit memo". Debit note can also be issued for other adjustments
like loss in transit, discounts over and above what was agreed or some other transactions, which
warrant an adjustment to the invoice.

Excise Duty Challan

Excise duty challan is the documentary evidence of payment of excise duty. Excise duty is
payable to authorities and the way typically handled in ERP is by defining tax authority as a
Vendor. Hence, this document also becomes part of the buy-to-pay process. An excise or excise
tax (sometimes called a duty of excise special tax) is an inland tax on the sale, or production for
sale, of specific goods or a tax on a good produced for sale, or sold, within a country or licenses
for specific activities. Excises are distinguished from customs duties, which are taxes on
importation. Excises are inland taxes, whereas customs duties are border taxes. An excise is
considered an indirect tax, meaning that the producer or seller who pays the tax to the
government is expected to try to recover or shift the tax by raising the price paid by the buyer.
Excises are typically imposed in addition to another indirect tax such as a sales tax or value
added tax (VAT). In India, almost all manufactured products are included for excise duty. In
India, for getting excise tax, Govt. of India has made Automation of Central excise and service
tax with this, manufacturer can easily pay their excise tax online on every 10th of following the
month through ER -1.

Service Tax Return & Service Tax Challan

Service Tax is a tax imposed by Government of India on services provided in India. The service
provider collects the tax and pays the same to the government. It is charged on all services except
the services in the negative list of services. All assesses are required to file a service tax return
with the authorities along with copies of tax paid challans. Service Tax is payable to authorities
and the way typically handled in ERP is by defining tax authority as a Vendor. Hence, this
document also becomes part of the buy-to-pay process.

TDS Return & TDS Challan

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TDS is one of the modes of collection of taxes, by which a certain percentage of amounts are
deducted by a person at the time of making/crediting certain specific nature of payment to the
other person and deducted amount is remitted to the Government account. It is similar to "pay as
you earn" scheme also known as Withholding Tax in many other countries, one of the countries
is USA. The concept of TDS envisages the principle of "pay as you earn". It facilitates sharing of
responsibility of tax collection between the deductor and the tax administration. It ensures
regular inflow of cash resources to the Government. It acts as a powerful instrument to prevent
tax evasion as well as expands the tax net. Tax must be deducted at the time of payment in cash
or cheque or credit to the payee's account whichever is earlier. Credit to payable account or
suspense account is also considered to be a credit to payee's account and TDS must be made at
the time of such credit. The deductor is the employer in cases where the payments are salaries. A
deductor is required to issue a TDS certificate to the deductee within a specified time. Returns
should be filed at timely intervals with the tax authorities and return should contain the details of
payments done to central government account, for TDS. TDS is payable to authorities and the
way typically handled in ERP is by defining tax authority as a Vendor. Hence, this document
also becomes part of the buy-to-pay process.

Advance Tax Challan

Under the Income Tax Act, every assessee is required to pay tax in a particular financial year,
preceding the assessment year, on an estimated basis. However, if such estimated income is less
than 10000, then no advance tax is payable. Advance Tax is payable to authorities and the way
typically handled in ERP is by defining tax authority as a Vendor. Hence, this document also
becomes part of the buy-to-pay process.

VAT Return and VAT Challan

A value added tax (VAT) is a form of consumption tax. From the perspective of the buyer, it is a
tax on the purchase price. From that of the seller, it is a tax only on the value added to a product,
material, or service, from an accounting point of view, by this stage of its manufacture or
distribution. The manufacturer remits to the government the difference between these two
amounts, and retains the rest for themselves to offset the taxes they had previously paid on the
inputs. VAT was introduced into the Indian taxation system from 1 April 2005. Of the 28 Indian
states, eight did not introduce VAT. Each Indian state has a different sales tax. VAT is payable to
authorities and the way typically handled in ERP is by defining tax authority as a Vendor. Hence,
this document also becomes part of the buy-to-pay process.

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Accounts Payable Department
Large companies have huge number of suppliers. To remain competitive they need to manage
their procure to pay process very effectively. They create specialized division to handle these
operations.

The business department that is responsible for making payments owed by the company to
suppliers and other creditors is also often referred to as Account Payable (AP).

Account Payable Process

Given below is the complete Accounts Payable Process:

1. Issue Purchase Order:

The AP Process starts with the issue of Purchase order to the Supplier. The purchase order
specifies what you intend to buy, the make and the quality of the goods. In some cases it also
specifies the agreed quantity and the price.

2. Receive Goods:

Based on the purchase order the supplier will ship a product. Till goods have been received by
the customer, the ownership generally lies with the supplier. Once the goods are received at your
go down, you become the owner of the goods.

3. Inspect Goods:

Most organizations have the internal control processes to inspect the goods to ensure the quantity
and quality of the supplied material.

4. Enter Invoice:

Supplier issues an credit invoice, and collects payment later. This describes a cash conversion
cycle, a period of time during which the supplier has already paid for raw materials but hasn't
been paid in return by the final customer. Received invoice is accounted for in the books of the
customer.

5. PO Match and Receipt Match:

When the invoice is received by the purchaser it is matched to the packing slip and purchase
order, and if all is in order, the invoice is paid. This is referred to as the three-way match. The
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 three-way match can slow down the payment process, so three-way matching may be limited
solely to large-value invoices, or the matching is automatically approved if the received quantity
is within a certain percentage of the amount authorized in the purchase order.

6. Release and Make Payment:

Once the matching is done and accounts payable department is satisfied to the accuracy and
validity of purchase, the refer to the payments terms. Companies may have negotiated different
payment terms with different suppliers. Payment is released based on the agreed payment terms
and amount is issued to the supplier.

7. Bank Reconciliation:

Generally the payment is made through the bank. There is a slight delay between the date when
the payment is released and when it reaches to the account of the supplier. The bank entry is
reconciled to the original payment entry in the Payments Register to reconcile the both accounts
and this completes the account payable process.

In the next video tutorial we will take you through the accounting entries in the payable process.

Given below are some other activities that happen during the AP processing cycle:

1. Define and maintain supplier information to be used at the time of invoicing and payment
2. Enter invoice information 
3. Match invoices to Purchase Orders
4. Define, enter and import employee expense reports as expenses are also part of payables to
employees
5. Set up bank accounts for payment to Vendors
6. Enter manual payments or use EDI to make automated payments
7. Pay invoices
8. Stop and void payments in case any holds are required
9. Enter and apply prepayments to invoices, adjust advances
10. Enter and apply employee advances
11. Create recurring invoices for same type of invoices
12. Transfer invoices and payment details to General Ledger to ensure proper accounting
13. Before any ERP System works, you might need to define the tax defaulting rules and principles

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Subsidiary Ledgers – AP Ledger
 Imagine what the size of your General Ledger would be if you have 8000 different suppliers
sending you more than 2000 items that you trade in? Subsidiary Ledgers help manage and store
specific information regarding each of the control accounts in your GL. and Sub Ledger for AP
is called AP Subsidiary Ledger.
The purpose of Accounts Payable Sub ledger is to manage the suppliers and the payments related
to purchases.

An accounts payable invoice gets recorded in the Account Payable sub-ledger at the time an
invoice is received and validated that the respective goods corresponding to the invoice have
been received. Then it is verified and vouchered for payment as per the payment terms agreed
with the Supplier.

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Accounts Payable Journal Entry
Accounts Payable Journal Entry
As discussed earlier “Accounts Payable” refers to the accounting entry that indicates a short term
liability payable to the supplier of goods and services for the goods supplied or services
rendered.

Although in the large organizations the Procure to Pay Accounting process starts when the
purchase order for supply of goods is released to the supplier. To keep things simple in the
beginning we will discuss the core accounting entries related to the Accounts Payables process.

Receipt of Goods:
You issue purchase order to the supplier and he supplies you with the goods. Once the ownership
of the goods gets transferred from the supplier to us, we account for the goods as our inventory
and based on the invoice received from the supplier need to create a liability for the payment due
to him. At this stage the accounting entry is:

Debit    Inventory Account

Credit   Accounts Payable Account

Making Payment to the Supplier:

Once the payment for the invoice is released then funds gets released from the bank or cash and
the amount due to the supplier gets knocked off. For this part the accounting entry is:

Debit     Accounts Payable Account

Credit   Cash/Bank Account

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Accounts Payable Description
Accounts Payable Description
“Accounts Payable” is used as a generic term to represent various different things related to AP
process. Some of the common usage of the term is:

Accounting Entry: As explained before “Accounts Payable” refers to the accounting entry that
indicates a short term liability payable to the supplier of goods and services for the goods
supplied or services rendered. It is a short term liability and categorized as Current Liabilities
under the balance sheet head “Liabilities”.

Accounts Payable Sub Ledger: Companies and businesses have huge transactions pertaining to
their accounts payable process. They receive goods and services from various suppliers and they
need to manage timely payments to these creditors to avoid default and adhere to the payment
terms. They use a subsidiary ledger generally referred to as “Accounts Payable Sub Ledger” and
sometimes just as “Accounts Payable”.

Accounts Payable Process: Accounts Payable term is also used to refer to the accounts payable
process. This process involves receiving the goods or services, verifying the quantity and quality
with the Supplier Invoice and releasing the payment as per the agreed payment terms.

Accounts Payables Department: As companies have large number of transactions related to AP

Process, hence many a times they need a separate division, branch or department to manage and
handle all the AP related transactions. That department is referred to as Accounts Payable
Department and sometimes just as Accounts Payables.

Eventually once we understand the accounts payable process and what are its elements we can
easily understand what is being referred to at any point in time.

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Define Accounts Payable
How do we define Accounts Payables:
We all use utilities. For example we take various services from the phone company, the gas
company and the cable company. They provide us the goods and services first and as the end of
the agreed billing period they raise an invoice on the customer. In this case the Utility Company
is our Creditor and they have provided us the service on credit. The amount payable to the utility
company is the “Account Payable” for us, which needs to be paid in very short-term to the utility
company (Supplier/Creditor) to enjoy continued services.

Similarly credit is extended in the normal course of business to the customers on purchase of
goods and services and needs to be paid off within a given period of time in order to avoid
default.

Payables are often categorized as “Trade Payables” & “Expense Payables”. “Trade Payables” are
the monies due for the purchase of physical goods that are recorded in Inventory. “Expense
Payables” are the monies due for the purchase of goods or services that are expensed. Common
examples of Expense Payables are utilities like telephone and electricity.

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 Accounts Payable Definition
What is Accounts Payable

 Accounts payable is the amount owed for the purchase of goods or services at a specific
date.
 It is the money that a company owes to vendors for products and services purchased on
credit extended in the normal course of business.
 As a general practice suppliers offer to their customers credit, which is an payment
arrangement to pay for a product or service after it has already been received.
 Accounts Payable is presented as Current Liabilities under the Liability section of the
Balance Sheet. It represents a negative cash flow for the company.
 Accounts payable are often referred to as "payables".
 Accounts Payable is considered as Current Liability, meaning that it is a short term credit
extended to the business expected to be fulfilled in less than a year

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