End to End Journal Entries for Purchase Orders

 

Creating end-to-end journal entries for purchase orders involves recording the financial transactions associated with the entire procurement process. Here's a step-by-step breakdown of journal entries related to the purchase order process:

1. Request for Purchase:

• When a department identifies the need for goods or services and generates a Request for Purchase (RFP) or Purchase Requisition, no financial transactions are recorded at this stage.

2. Vendor Selection and Quotation Comparison:

• No financial transactions are recorded during the vendor selection or quotation comparison stage.

3. Purchase Order Creation:

• Once the Purchase Order is created and approved internally, the following journal entry is made:

  
  Debit: Purchase Order Liability
  Credit: Accounts Payable
  

This entry recognizes the commitment to pay the vendor for the goods or services ordered.

4. Sending the Purchase Order:

• When the approved Purchase Order is sent to the vendor, there is no financial transaction recorded.

5. Order Fulfillment:

• As the supplier fulfills the order, no financial transactions are recorded at this stage.

6. Delivery and Inspection:

• When the goods are received and inspected, and there are no discrepancies, no financial transactions are recorded.

7. Invoice Matching:

• Upon receiving the supplier's invoice, a journal entry is made to recognize the liability and match it with the Purchase Order:

  
  Debit: Accounts Payable
  Credit: Purchase Order Liability
  

This entry ensures that the accounts payable accurately reflects the outstanding payment to the vendor.

8. Payment Processing:

• When the payment is processed, the following journal entry is made:

  
  Debit: Accounts Payable
  Credit: Cash/Bank
  

This entry records the actual payment made to the vendor, reducing the accounts payable balance.

9. Record-Keeping:

• All relevant documents, including the Purchase Order, delivery receipts, and invoices, are maintained for record-keeping purposes. However, these activities do not involve specific journal entries.

It's important to note that the exact journal entries may vary based on the organization's accounting policies, systems, and specific circumstances. Additionally, certain steps in the purchase order process, such as vendor selection and order fulfillment, do not typically involve direct financial transactions but are crucial for the overall procurement process.