December 4, 2008

Dynamics GP Three-Way Match Process

or, How I Learned to Love My Purchase Accrual Account

A significant number of clients that I’ve worked with in the past (and present) have a tough time wrapping their brains around the Purchase Accrual account and how it is interrelated with receiving and invoicing of purchased goods. This lack of clarity results in unreconciled accounts, duplicate postings to inventory and expense accounts, and an accountant’s worst nightmare if allowed to go unchecked for very long. This is an attempt to help clarify the Purchase Accrual concept and point out the necessity of keeping it reconciled with the Received not Invoiced report and/or SmartList.

In an ideal world (and we all want to live there, right?) these are the correct steps, in chronological order, for receiving goods, entering the vendor invoice, and paying the vendor. Following these steps in correct order ensures a successful three-way match process and happy GL accountants -

1. Issue Purchase Order
2. Receive goods
3. Enter invoice
4. Pay invoice

1. Purchase Order Entry

This is not a transaction per se. The PO is just a document that stores the information against which Receiving Transactions will be done – unless the receipt and/or invoice are entered at the time of PO entry, which GP allows with the proper security but surely violates segregation of duty principles.

2. At goods receipt, the accounting transaction that occurs is (using inventory as an example)

Debit (Dr.) Inventory (01-99-1300-000-00)
Credit (Cr.) Purchase Accrual (01-99-2001-000-00)

3. At invoice entry (using the Enter/Match transaction), the accounting transaction that occurs is

Dr. Purchase Accrual (01-99-2001-000-00)
Cr. Accounts Payable (01-99-2000-000-00)

4. At invoice payment, the accounting transaction that occurs is

Dr. Accounts Payable (01-99-2000-000-00)
Cr. Cash (01-99-1023-000-00)

As you can see, Purchase Accrual is just a “clearing account” used to temporarily hold the value of the goods until the invoice is received and matched against the receipt. (This concept, in the good old days, took the form of a file drawer with packing slips and copies of purchase orders stapled together and formed the basis of the - now get this - the Purchase Accrual journal entry made at the end of each month.)

Note: The Purchase Accrual account gets cleared to zero when the Invoice is posted – as long as the Invoice Quantity is greater than or equal to the Receipt Quantity. If the Invoice Quantity is less than the Receipt Quantity, a balance will remain in the Purchase Accrual account (the value of the difference between the Receipt Quantity and the Invoice Quantity) and will be cleared when the remaining quantity is invoiced.

If the remaining quantity is never invoiced, the balance in the Purchase Accrual account will be cleared if and when the Purchase Order is closed.

The Receiving/Invoicing/Payment cycle is Complete
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Here’s what happens if the Invoice Receipt is not matched to the Goods Receipt using the Enter/Match transaction:

1. At goods receipt, the accounting transaction that occurs is

Debit (Dr.) Inventory (01-99-1300-000-00)
Credit (Cr.) Purchase Accrual (01-99-2001-000-00)

2. At invoice entry (using the Payables Transaction Entry), the accounting transaction that typically occurs is

Dr. Inventory (01-99-1300-000-00)
Cr. Accounts Payable (01-99-2000-000-00)

Effect – inventory is debited twice, Purchase Accrual never gets debited to clear the balance!!

Therefore, it is imperative to:

• Receiving must enter the receipt the day the goods are received so accounting will have a transaction to match the invoice to!!
• When posting the invoice, if there is a PO involved –
o Do not post the invoice until the receipt is posted
o Match the receipt quantity and $$ to the invoice quantity and $$
• Make sure your account distributions are correct
• If you don’t see a receipt to match the invoice to, immediately tell the Receiving Department so they can post the Goods Receipt transaction before you proceed!!

A FINAL TIP

Never, never, ever post a general journal entry to AR, AP, Inventory, or Fixed Assets. These all tie to sub-ledgers and posting a JE to one of these control accounts will cause them to not reconcile to their sub-ledger!!

2 comments:

victoriayudin.com said...

Frank,

Great explanation of the process and very much needed. I would also add Cash to the list of accounts not to post to directly in the GL.

Victoria

Vaidy said...

Hi Frank,

I recently faced this issue, but I was not looking anything more than some technical gaps. I was merely checking tables and stuffs like that. After reading the article, I took more time to understand the functionality, but finally I did.

This article could have come a bit early. :-)

And thanks to Victoria for adding that important point.

Thanks
Vaidy
http://vmdyngp.blogspot.com