Purchase Ledger is probably the most time-consuming of all the book-keeping functions. It is not simply a matter of posting invoices - there is a lot more work to do than just that. To start with, all incoming invoices and expense claims need to be checked and authorised. They then need to be coded to the correct accounts in the Nominal Ledger and finally payments need to be made and approved by the appropriate signatories. This type of work can rarely be fully automated. It tends to be fairly labour intensive in that, inevitably, someone has to sit down with a pile of invoices and actually read them.
The book-keeping side of it is reasonably straightforward. Supplier invoices are credited to the Purchase Ledger control account and debited to the Nominal Ledger codes applicable to that particular expense type. Payments made to suppliers are debited to the Purchase Ledger control account and credited to the Cash Book. Therefore, the balance on the Purchase Ledger control account at any one time should be the aggregate amount owed by the business to its suppliers.
What is the Purchase Ledger control account? It is a summary of the balances on all the individual supplier accounts that form your Purchase Ledger. It will appear as one line on your Trial Balance and go into your accounts as Trade Creditors. It is called a control account because the balance on it must equal the sum of all the amounts owed to your suppliers. Thus, it acts as a control on the Purchase Ledger postings.
Purchase Ledger is a separate module in most computerised accounting systems. You first set up your individual supplier accounts and you then post invoices and payments to them. You should also be able to specify the supplier payment terms so your system can determine whether an account is due for payment or not. When a payment is posted, you have the option of either clearing it against individual invoices or treating it as a payment on account. There should be an audit trail showing which invoices have been cleared against which payments. You should also be able to view the supplier account and see which items have been settled and which are still outstanding.
All invoices and staff expense claims should be authorised by a responsible official on a Payment Requisition. This is basically just a cover sheet confirming the name of the supplier, the amount payable, the account codes it should be posted to, the VAT code, the cost centre, some brief details of the expenditure and why it has been incurred, the due date for payment, the method of payment, the payee bank details if paying electronically and the person authorising payment. For larger organisations, it is a good idea to give each Payment Requisition a sequential number so it is easier to keep track of them.
It is also good practice for each invoice to be checked against a Purchase Order, which is simply an authorisation for the money to be spent in the first place before the goods or services are received. This can take the form of either a standing instruction that is regularly updated or a separate authorisation for each individual transaction. The main point is that costs should not be incurred without prior approval of some kind, and it is best if the person authorising the cost is not the same individual as the person authorising the invoice, although that is not always practical in smaller organisations.
One of the most common problems with Purchase Ledger work is invoices being sat on by managers for weeks on end before being eventually released to the Accounts Department for payment. All invoices should ideally be sent to the Accounts Department as soon as they are received where they are recorded and forwarded to the appropriate persons for approval. However, with many invoices being sent by e-mail these days, it is not always possible to stick to this procedure. Sometimes it can be best to send an invoice to the Accounts Department with a Payment Requisition already prepared. Late invoices are usually only a problem when they fall due for payment before they have been released. The supplier often then sends a copy and the invoice can end up being paid twice.
Invoices that have not yet been authorised should be tracked separately from those that are merely awaiting payment and followed up with the individual concerned if not returned within a week. Many large organisations have an in-transit system on their Purchase Ledgers that keeps track of invoices pending authorisation. For smaller organisations without such sophisticated systems, it may be best to combine this financial control with other checks on the current status of invoices in their Purchase Ledger system.
Many small businesses use an off-the-shelf software package to maintain their accounting records, and Purchase Ledger is a job that is done maybe once a week. It can be easy to lose track of which invoices have been posted, which have been approved, which have been paid, which payments have been posted, and which haven't. However, a simple spreadsheet listing all invoices received and payments made, showing when they were received, approved, posted and paid, will enable you to keep track of all Purchase Ledger items. At first sight this may seem like overkill when you already have a proper system for running your Purchase Ledger, but it really does help to control the work, provided it is kept up-to-date! It is also a quick and easy way to look up which invoices are still outstanding and when payments were made without having to drill down into the Purchase Ledger records.
Payments made by direct debit or standing order often tend to bypass the Purchase Ledger as they are posted direct to the Nominal Ledger during the bank reconciliation process. Business rates, insurance and subscriptions are typical examples. This is technically wrong as it should be possible to look up all supplier costs and payments in the Purchase Ledger. Also, if the original invoice from that supplier was posted to the Purchase Ledger, it will look as though a balance remains owing if your monthly instalments are not posted to the supplier account.
Your Purchase Ledger system should be able to produce an aged creditor analysis showing all outstanding supplier balances and how old they are. It is important to review this regularly and take action to clear the oldest items. Credit balances may indicate duplicate payments or refunds still owing from the supplier. Older items may be incorrect postings that should be reversed out or evidence of mis-allocated payments. The aged creditor analysis should also be checked against supplier statements in case there are any discrepancies.
Finally, the security issues must never be overlooked. Cheque books and electronic banking systems can easily be abused if controls are not placed over them. Cheque books should always be locked away when not in use and bank passwords must be protected. Only those people responsible for paying suppliers should have access to them. Authorised signatories should not be the same individuals as those responsible for raising or approving Payment Requests. Electronic payments should be subject to strict controls. Banks are not responsible if their customers send money to the wrong accounts and it can take a long time for such mistakes to be rectified. Therefore, the authoriser should check the sort code and account number on the Payment Request with those shown on the invoice or other supplier notification. These details should then be checked against those shown on the actual bank instruction.
In short, Purchase Ledger is an area that is wide open to errors or abuse if your financial controls are insufficient or inadequate to prevent them. Always make sure that your employees are properly trained in the correct procedures and that you have robust systems for incurring costs, processing invoices and paying suppliers.