Auxiliary Standard Operating Procedures


SUBJECT:

Accounts Payable

SOURCE:

Auxiliary Accounting, Financial Management Services

DATE ISSUED:

May 2003

DATE OF LAST

REVISION:

 

March 2009

ASOP NO:

8.0

RATIONALE:

To record a liability for goods or services purchased/received but not paid for. This entry should be done so that the income statement and balance sheet are fairly stated, satisfying the matching principle1 to comply with Generally Accepted Accounting Principles (GAAP).

ASOP:

Accounts payable are recorded in Kuali Financial System (KFS), either by using the KFS PURAP (Purchasing/Accounts Payable) module or by manually recording payables by processing KFS documents. The processes and guidelines for both are identified as follows.

The organization should ensure that all unrecorded expenses are accrued for. This is discussed in detail later.

 

KFS PURAP:


Conditions:

  • The organization uses the KFS PURAP module for procurements. This portal is accessible via Onestart.
  • Vendors should send invoices directly to the Accounts Payable office.
  • All KFS PURAP transactions are for external payables.

Using KFS PURAP results in the creation of two automatic accounting entries. The first entry records accounts payable and is generated when an invoice is processed by the Accounts Payable office, thus resulting in an accounts payable balance. The second entry records the invoice payment.

 

Example:

An organization receives office supplies worth $100 and the accounts payable department enters the invoice.


The following entries recognize the liability, match the expense in the period incurred, and then reduce cash when the invoice is paid.

 

1) Recognizing the liability

 

 January

Object Code

Debit

Credit

Office Supplies

4100

$100.00

 

          Accounts Payable

9041

 

$100.00

 

2) Paying the invoice and removing the liability

 

This entry is generated when a Payment Request is disbursed. The timing of this entry is equal to or after the due date recorded on the document.

 

 

 February

Object Code

Debit

Credit

Accounts Payable

9041

$100.00

 

          Cash

8000

 

$100.00

 

January Effect:         Accounts Payable increased $100.00

                                           Expenses increased $100.00

 

February Effect:       Cash decreased $100.00

                                          Accounts Payable decreased $100.00

 

Total Effect:              Cash decreased $100.00

                                          Expenses increased $100.00

 

ACCRUING FOR UNRECORDED EXPENSES

 

It is important to check the transaction listing report in IUIE for expenses that have been incurred by the unit but not recorded in the KFS by the end of the fiscal period. Any expenses that are identified that need to be accrued for should be done so using the Periodic Method described below.

 

NON-KFS PURAP PROCESS:


Conditions:

  • Payments are made through the Disbursement Voucher process.
  • The organization has a payable from another internal account.

Three entries need to be made in order to record and process accounts payable.

  • The first entry records accounts payable on an AVAE document.
  • The next entry is generated when a Disbursement Voucher or Internal Billing is processed to pay off the liability.
  • The third entry (automatic AVAE) is just a reversal in the following period of the first entry above.

This third entry occurs because the liability is paid in one period and the offsetting expense also hits in the same period. If the entry did not get reversed, the expense would be double the true amount on the general ledger.

 

Note: KFS automatically assigns a reversal date in the following month when an AVAE is used (the initial entry). Then KFS automatically reverses the initial entry on that date. The organization should use the appropriate reversal date (changeable on the initial manual AVAE) if the payment will not occur in the following month.

 

Example:

  • An organization receives goods/services for the month of January as follows
    • Vehicle Expenses (paid to IU Motor Pool) (obj. code 4040) = $100
    • Advertising (obj. code 4802) = $300
    • Purchases for Resale (obj. code 5300) = $200
  • The organization then pays the invoices in the following period (February).


PERIODIC METHOD


1) Recognizing the liability (January)

AVAE

Object Code

Debit

Credit

Vehicle Expenses

4040

$100.00

 

Advertising

4802

$300.00

 

Purchases for Resale

5300

$200.00

 

          External Accounts Payable

9000

 

$500.00

          Internal Accounts Payable

9117

 

$100.00

 

2) Issuing the check (February)

 

IB

Object Code

Debit

Credit

Vehicle Expenses

4040

$100.00

 

          Cash

8000

 

$100.00

 

 

DV

Object Code

Debit

Credit

Advertising

4802

$300.00

 

Purchases for Resale

5300

$200.00

 

          Cash

8000

 

$500.00

 

3) Automatic reversal of the January entry (February)

 

AVAE

Object Code

Debit

Credit

External Accounts Payable

9000

$500.00

 

Internal Accounts Payable

9117

$100.00

 

          Vehicle Expenses

4040

 

$100.00

          Advertising

4802

 

$300.00

          Purchases for Resale

5300

 

$200.00

 

January Effect:   Accounts Payable increased $600.00

                                    Expenses increased $600.00

 

February Effect:  Cash decreased $600.00

                                    Expenses decreased $600.00   

                                    Expenses increased $600.00

                                    Accounts Payable decreased $600.00

 

Total Effect:        Cash decreased $600.00

                                    Expenses increased $600.00

DEFINITIONS:

Accounts payable – This arises when an account receives goods, supplies, or services in a given month and does not pay for them at the time of purchase. Accounts payable are usually recorded at their face value since the time between purchase and payment is usually short. Note: Encumbrances are NOT accounts payable.


External payable – This is a payable outside the university (paid for by check, etc.)


Internal payable – This is a payable within the university (paid for by internal documents).


Periodic method – Balances are adjusted periodically to reflect changes instead of being kept current through the year.

CROSS

REFERENCE:

 

ASOP 3.0 - Accruing vs. Adjusting Entries--Auxiliary Voucher Use

RESPONSIBLE

ORGANIZATION:

 

Auxiliary organizations reporting accounts payable.

1"The matching principle means that revenues generated and expenses incurred in generating those revenues should be reported in the same income statement. Revenues for an accounting period are recognized in accordance with the realization principle. Then the expenses incurred in generating those revenues are determined in accordance with the matching principle. Thus, expenses are reported in the income statement for the accounting period in which the related revenues are recognized." (Intermediate Accounting, by Chasteen, Flaherty, and O'Conner; McGraw-Hill, Inc.; p. 60).