Overview of Accounting Process for Purchase Orders

The following is a brief overview of the Purchase Order process from an accounting perspective:

Purchase Requisition (PR)

What is it?

A request for approval to proceed with an order for goods and services

What happens in FIS?

• A reservation (commitment) is made against the departmental budget recorded in the Funds Management (FM) accounts (CFC or CFC/Fund combination)
• No “actuals” are recorded against these accounts at this time

Purchase Order (PO)

What is it?

A contract between a customer and a vendor regarding the purchase of goods and/or services stipulating some terms and conditions concerning the purchase

What happens in FIS?

• If a purchase requisition has already been created in FIS, there is no financial impact on the amount of budget reserved for this transaction; the reservation (commitment) against the departmental FM accounts already exists. The actual commitment is moved from the purchase requisition to the purchase order.
• If a purchase requisition is not already created, the purchase order transaction is created and a reservation is made against the budget in the departmental FM accounts.
• No “actuals” are recorded against these accounts at this time

Goods Receipt (GR)

What is it?

An acknowledgement of the “receipt” (e.g. acceptance) of goods and/or services. This implies that the payment can proceed because the conditions of the Purchase Contract (e.g. P.O.) have been met.

What happens in FIS?

• In the departmental FM accounts:
  • The commitment (reservation) against the budget in the departmental FM accounts remains unchanged.
  • No “actuals” are recorded against these accounts at this time.
• In the departmental Controlling (CO) accounts (Cost Center or Internal Order)
  • An entry is made as follows:
    • DR: Expense (against the departmental cost center or internal order only)CR: Accrued Liability account (G/L 537000)
      The posting of the GR document represents the acceptance of the goods and/or services as delivered, and records this as an “accrued” University liability. An “accrued” liability is one where we (UofT) acknowledge that a payment is owed to an external party, but no formal request (e.g. invoice) for payment has been received.

Invoice Receipt (IR)

What is it?

Formal request for payment by a vendor for goods and/or services delivered.

What happens in FIS?

• In the departmental FM accounts two events occur:
  • The PO commitment (reservation) is reduced by the amount requested in the invoice and a corresponding amount of budget is made available for payment
  • An “actual” expense transaction is recorded at this time Note: The same budget dollars that had been reserved by the PO transaction are now being used to issue payment to the vendor; the PO commitment transaction is replaced with an “actual” expense transaction.
• In the departmental Controlling (CO) accounts (Cost Center or Internal Order):
  • There is no activity as a result of this transaction; the CO accounts are only updated at the point that the GR document is posted.
• Since a request for formal payment has now been made, the IR document results in the following posting to the UofT accrual and vendor accounts
  • DR: Accrued Liability account (G/L 537000)
    CR: Vendor account
    This entry moves the liability record from the “general liability” account (G/L 537000) to the appropriate vendor account for payment.

What to do when corrections are required to a Purchase Order document

Purchase order no longer required:

See the quick reference guide: Finalize and Cancel Purchase Order

Goods Receipt document recorded, but payment to the vendor was not processed using the Invoice Receipt process (e.g. entered as a “certified invoice”)

Two steps are required:

1. Reverse the Goods Receipt document; see the quick reference guide: Goods Receipt Reverse
2. Cancel Purchase Order; See the quick reference guide: Finalize and Cancel Purchase Order

If you have any further questions, please contact your FAST Team Faculty Representative .