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Invoicing Process

Invoice coding is the process of assigning unique codes to invoices to link them to the appropriate financial records, helping businesses track expenses and allocate payments correctly. There are two types of invoices: PO invoices, which are linked to purchase orders and can be easily coded, and non-PO invoices, which require manual coding due to their unplanned nature. Automation in invoice coding can streamline this process, making it faster and more accurate as businesses grow and face increasing invoice volumes and complexities.

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7 views4 pages

Invoicing Process

Invoice coding is the process of assigning unique codes to invoices to link them to the appropriate financial records, helping businesses track expenses and allocate payments correctly. There are two types of invoices: PO invoices, which are linked to purchase orders and can be easily coded, and non-PO invoices, which require manual coding due to their unplanned nature. Automation in invoice coding can streamline this process, making it faster and more accurate as businesses grow and face increasing invoice volumes and complexities.

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What is invoice coding?

Invoice coding is the process of adding information to an invoice using a system of unique codes.
The codes connect the invoice items to the appropriate expenses in your company’s financial
records. For example, if your company buys a box of pencils, the invoice for stationery can be
assigned with the general ledger (GL) code.

Businesses use GL codes to track the account, department, location, project, or cost center
responsible for the incoming invoice. The codes help accounts payable departments allocate
vendor payments to the right budgets, track expenditures, calculate profitability and performance,
and produce financial reports.

Examples of invoice codes

Most businesses have a unique coding system based on their specific needs. Some common codes
include:

 Part numbers

 Locations

 Vendor or customer

 Purchase order numbers

 Department

 Expense category

What’s the difference between PO and non-PO invoices?


PO invoice

A PO invoice (or PO-backed invoice) is for terms of a purchase that have


already been agreed upon through a purchase order. Usually, the purchase
order contains the GL codes or table items and other information needed to
code the invoice.

Non-PO invoice

A Non-PO invoice is for a purchase not associated with a purchase order. Non-
PO invoices are commonly used for services, recurring invoices, or unplanned
business expenses such as repairs. They differ from PO invoices because the
AP team must manually code them. Also, the costs associated with non-PO
invoices may not be approved, so the invoice needs to be coded correctly to
ensure it goes to the right approvers.
Coding non-PO invoices involves looking up the table items and other
information needed to code the invoice, then allocating the invoice to the
appropriate general ledger account and assigning a GL code.

With these differences in mind, let’s look at the steps in the invoice coding
process:

Step 1: Invoice review and data entry


When a new invoice arrives, the AP team reviews it to ensure it’s legitimate, to
check if the invoice is associated with a PO, and to identify the nature of the
expenses. After reviewing the invoice, they manually enter the invoice data
into the accounting system.

Once the AP team enters the invoice data, they manually code the invoice. As
mentioned above, the coding process differs for PO and non-PO invoices. To
simplify things, we’ll describe the next step as steps 2a (PO invoices) and 2b
(non-PO invoices).

Step 2a: PO invoice coding


The coding process is simple if the invoice is associated with an existing
purchase order.

2-way matching

The AP team tracks down the PO from purchasing so the invoice can be
verified and coded. Then, the invoice authorizer verifies the invoice by
ensuring the invoice details match the PO details and reconciles any
discrepancies or exceptions. For example, if the PO has 10 line items, and the
invoice has 8, the AP team contacts the procurement department to find out
what happened to the other two line items. After they have reconciled the
invoice they move to Step 3.

Step 2b: Non-PO invoice coding


If the invoice is not associated with a purchase order, the AP team must code
the invoice manually. The AP team identifies the expense and determines the
appropriate expense category, cost center, or department for the invoice and
to which GL account it should be allocated. This can involve referring to similar
expenses or contacting the purchaser for more information.

Step 3: Assign the GL code


The AP team assigns the associated GL code to the expense. Assigning the
code links the expense to the right GL account and ensures the expense is
recorded correctly in the company’s financial records.

Step 4: Document the coding process


After coding the invoice, the AP team records the invoice, the PO if present,
the assigned GL code, and any notes or communication for future reference
and to keep a complete audit trail.

Step 5: Approval and payment


After the invoice is coded, the AP team sends it to the correct approver for
approval and payment, and the process ends.

The trouble with manual GL coding


Although the manual invoice coding process is a good way to track and record
expenses, it can be time-consuming and error-prone, especially for growing
businesses that process large numbers of paper invoices.

In AP in 2023: Expectations, Technology, Opportunity, Stampli asked finance


leaders about their expectations regarding the volume of invoices their
companies would receive in the near future. The results showed that almost
75% of respondents expect the number of invoices to increase, with 27%
anticipating a significant increase. Additionally, over half of respondents
predict that invoice complexity will grow.

As your business grows, its expenditures will grow along with it, and so will the
number of GL codes you use to track those expenditures. You may face a
challenge scaling manual invoice processing workflows to handle this growing
workload and complexity while controlling errors and maintaining an efficient
workflow.
The process of identifying and coding expenses is also labor-intensive. For
example, identifying and correctly coding expenses for a non-PO invoice could
require tracking down codes in a spreadsheet, ERP, or even another
employee’s memory.

By streamlining these manual tasks, automation makes invoice coding faster,


more accurate, and more scalable, so it supports your business growth.

How does automated invoice coding work?


Automated invoice coding is a core component of invoice processing software.
It leverages AI and machine learning to capture invoice data and add the right
vendor, GL codes, expense accounts, and cost allocations.

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