Ultimate Guide to Coding Invoices

Invoice coding involves categorizing spending and assigning them to particular accounts. At first glance, everything seems elementary, but such a process is often skipped when working with accounts payable (AP) or accounts receivable (AR). However, such neglect can cost more than you thought. According to Nanonets, firms without automation spend $6.30 per invoice, while each payment document costs businesses that adopt the appropriate software $1.45.

Correct coding is critical when creating financial statements, budgeting, and making rational solutions. Inaccuracies, even such elementary as incorrectly recording debits and credits, may lead to law violations and distortion of data. In this blog post, we’ll cover invoice coding, its essentials, and the advanced practices for coding payment documents in AP.

What is Invoice Coding, and Why Is It Important?

Invoice coding is a traditionally manual task that requires specialists to review all incoming payment documents and assign them the correct code. Such combinations, usually a mix of numbers and letters, have many uses, from helping to sort expenditures to complying with legislation. They allow you to define particular counterparties and accounts for credit and debit, which meets double-entry bookkeeping standards.

The coding invoices may also include the payment document date, payment period, terms, GL posting date, or even a product or service description.

It is not by chance that we emphasize the word “traditionally,” as many firms are opting for digital transformation to streamline the full workflow from order to money transfer, including coding. This lets you abandon many paper procedures and delegate them to specialized software.

How to Code an Invoice?

Before you start the procedure, it is essential to realize the various aspects of this activity. The algorithm may vary depending on whether the firm utilizes a payment document with a purchase order (PO) or without it. Below, we will discuss how to code invoices:

• Receipt of payment. The procedure is initiated when a counterparty sends a bill. The document can be in physical or digital form.
• Processing the invoice. AP specialists check the document for compliance. Later, they collect information about the counterparty, including the company name, account number, description of commodities or services. In some cases, at this time, AP specialists also compare the PO and the invoice to confirm that the commodities or services were ordered and delivered. When coding non PO invoices, this step may be skipped.
• Coding of invoices. Once the information is collected, it is the perfect moment to code the invoice. Coding allows finance departments to classify different spending categories. Specialists use different coding algorithms, including assigning a general ledger (GL) code and allocating cost centers and tax aspects.
• Approval of the document. Given the control procedures adopted in the firm, an encrypted document occasionally requires approval. It is the responsibility of the head of the department. Approval is typically relevant if the sum exceeds a particular value.
• Payment. Once the specialists approve the document, it is sent for money transfer.

It is a manual procedure, which, although comfortable for small firms, is protracted and prone to inaccuracies, primarily if AP experts work with many documents daily.

Human mistakes at any stage of the procedure may lead to inappropriate spending distribution, incorrect reporting, and capital work. Eliminating manual tasks from such an activity raises efficiency and decreases inaccuracies.

Common Types of Codes Used in Invoice Processing

Next, you need to define the main classes of codes. Below, we will examine the main options and how to utilize them.

• GL combinations are original combinations assigned to each account in the company’s ledger. They include numbers and letters utilized to categorize expenditures. This is a basic option to define and classify operations in the general ledger chart of accounts. Each cost item is assigned to one of the listed accounts, which affects the preparation of documents, such as cash flows and an income statement.
• Cost centers are like separate pockets of the firms where cash is spent but not directly obtained. These may be teams, including marketing, IT, etc. By assigning an account to the appropriate cost center, management may understand how much each group is spending. Suppose the IT team is regularly over budget. Using cost center coding, finance professionals will quickly notice such a tendency and take the necessary actions to adjust the budget or decrease expenditures.
• Projects and job options. In companies where the job is performed on a project basis, it is essential to understand the cost of each project. This is where project combinations come in handy. They allow you to distribute costs across projects to help determine their profitability. Let’s say you work for a building firm and simultaneously perform several projects with different budgets and expenditures. By coding each payment document for a separate program, you can monitor the expenditures of the labor force, materials, etc.

Proper coding will help you track expenditures, allowing you to calculate whether monthly spending is comparable to the annual budget. It will also enable you to avoid unnecessary expenditures and other unpleasant financial surprises.

Best Practices for Efficient Invoice Coding

Now that we know all the primary aspects of coding payment documents, it is essential to understand how to overcome all the obstacles when dealing with them and ensure maximum transparency and efficiency.

• Utilize software. Automation of work with payment documents speeds up data collection, provides smart encoding suggestions based on your past actions, and advanced features for detecting and resolving inaccuracies. Implementing reliable software streamlines the procedure and frees up your AP specialists to handle more complex tasks. Such platforms reduce the number of manual input errors.
• Do not neglect employee training. Inform experts about innovative approaches to accounts payable coding and platform innovations. By receiving new skills and ideas, they will increase their efficiency.
• Define coding rules. Create and send coding instructions to all involved parties. Ensure the staff understands the expenditure classes and all the process stages corresponding to your firm’s category.
• Monitor the counterparty database and constantly make changes to the supplier database. This seemingly insignificant procedure will shorten the coding period by automating form filling. Create a feedback loop and an ecosystem where your employees may share any challenges they face while coding. Sharing experiences is crucial to ensuring continuous improvement and refinement of the automated coding procedure.

Using these practices, you may avoid many troubles and ensure a smoother experience.

Solutions to Common Invoice Coding Problems

Although invoice coding is an integral element of a firm’s accounting transaction, it has its troubles. Whether you own a local firm or a transnational organization, the following challenges may arise when performing the work manually, making the procedure more problematic and protracted:

• Additional staff must be hired to increase the coding and payment processing volume.
• Understanding all the coding stages requires training, which decreases the efficiency of new staff.
• Complications arise during coding that can lead to delays in the registration, approval, and payment of invoices by counterparties. In addition, the firm loses the ability to receive additional discounts for prompt payment. Sometimes, it is even necessary to pay penalties for late payments.
• Human errors often occur when performing such work, which leads to an imbalance between spending and budget.
• The expenditures of interacting with payment documents increase.
• There is no option to consider actual accounts payable. This does not offer you a complete picture of the capital needed to pay all bills, which may lead to unpleasant surprises.

As the firm develops, your expenditures and the list of codes to track them will increase. The identification and coding procedure will also be labor-intensive. By optimizing these manual procedures, automation makes coding scalable and transparent. Setting up automated invoice processing may seem daunting. It is essential to select an optimal platform, convince the finance group to invest in it, and adopt the software. Once you’ve overcome all these hurdles, you’ll be unhappy that you didn’t adopt it sooner.

Final Words

In conclusion, invoice codes are pivotal to facilitate your firm’s accounting functions. They provide a structure to organize financial operations, reduce inaccuracies, facilitate communication and collaboration between various groups and users, and ensure compliance with bookkeeping norms. Therefore, adopting a consistent and comprehensive encoding algorithm that fits your firm is critical.

BooksTime specialists may help automate AP processes, enhance document coding accuracy, and decrease the burden on finance groups. With an effective coding system, you may gain more accurate insights, make smarter decisions, and grow your company.