Journal Entry for Invoice Received

Invoice is the commercial document that suppliers send to customer to ask for payment over the purchase of goods or services.

Normally, the supplier will send the invoice to the customer after the delivery of goods or services. Some company delivers invoices along with the goods so it is easy for both parties.

The customer needs to check if the goods and service are already received. They also need to check if they already accrued the transaction yet. If they have not yet made any record regarding the purchase, they need to record accounts payable. However, if they already accrue, they have reverse accrued payable to accounts payable.

Invoice is part of three ways matching that customers need to check before making payment to the supplier. Accountant compares purchase order, GRN, and Invoice to ensure the correct payment is made. Company only pays for the purchase that they ordered, received, and billed.

Journal entry for invoice received

When the company receives an invoice from the supplier, they need to check if the company has received the goods or consumed service from supplier yet.

Invoice is not the document which is determined the recognition of liability. Yes, you read it right. After receiving an invoice from supplier, it does not mean that we need to record accounts payable.

The accounts payable should be recorded when the company receives goods (risk & reward is transferred).

However, most accounting systems require company to record invoice numbers as the reference to the accounts payable. It allows the accountants to trace back to invoice and prepare three ways of matching before making payment. Three ways matching is the comparison between purchase order, invoice, and goods received note. It was usually done before making payment.

So what should we do when receiving the invoice from supplier. We have two options which will be discussed below:

Option 1:

Company needs to record an accrued liability when they receive goods or services from suppliers even suppliers not yet delivered invoice. The journal entry is debiting expense/assets and credit accrued liability.

The transaction may debit assets or expenses depending on the nature of the purchase. The amount record will depend on the agreed price on the purchase order or any other best estimation.

When supplier bill the invoice, the company will reverse the accrued liability to accounts payable. If there is any difference between accrued amount and invoice, it will impact the expense or assets account.

It will move the liability from accrued to accounts payable. The accounts payable is easier to control as it links to the supplier invoice and other information.

This method is used when the company wants to make a proper recognition of assets/expense and liability. It provides accuracy over the cut-off point of recording. It’s very important when supplier deliver goods before year-end and deliver invoice in the new year. However, it also has a drawback which is the workload. Accountants need to double record for each transaction and they need to keep track of the accrued listing which needs to reverse back to accounts payable.

Option 2:

Company will not record any transaction when receiving goods and services. They only record when receiving supplier invoice. When receiving invoice, company will debit assets/expenses and credit accounts payable.

This transaction will increase assets or expenses depending on the nature of purchase. At the same time, it increases accounts payable on balance sheet.

This method will require only one recording for each transaction. We only record when the amount is clearly stated by the supplier, so there is no difference. However, it is not really a correct cut-off when we receive goods first and wait for invoice to make a recording. But it will not a problem when we know that invoice will arrive in a few days after the delivery of goods. If the delivery happens before year-end, and invoice arrives after year-end, company should make the adjustment to prevent understate of assets/expense and liability.

Both methods have their own benefits and limitation. Company needs to select the one which fits its own operation. But they need to ensure that the correct cut-off is made at the year-end.

Journal entry for invoice received Example

On 01 April, ABC issue the purchase order to supplier to purchase raw material for $ 50,000. On 10 April, the material arrive and the quality meet the company requirement. However, invoice do not yet arrive until 12 April, supplier usually issues invoices within 3 days after delivery of goods. Please make a journal entry related to this purchase.

On 10 April, company received goods from supplier, risk, and reward are transferred. But the company knows that invoice late only 2-3 days and it will not impact the company recording as it is not year-end or month-end. So they decide to wait for invoice.

On 12 April, ABC receive an invoice with the exact amount, so they record a debit inventory of $ 50,000 and credit accounts payable.

The transaction will increase the inventory by $ 50,000 and accounts payable for the same amount.

Example 2

XYZ  purchase a truck cost $ 200,000 to support the material transportation. The truck arrive on 25 December, however, the invoice will not receive until January. Accountant needs to record this transaction and prepare an annual financial statement. Please prepare the journal entry for this purchase.

On 25 December, XYZ receive a truck from supplier, risk, and rewards were already transferred. Company should record this transaction to reflect in the financial statement. Otherwise, the balance sheet will understate assets and lability. Company already has the agreed price (PO or Purchase agreement).

The journal entry is debiting Fixed Assets $ 200,000 and credit accrued payable.

The transaction will increase fixed assets by $ 200,000 on balance sheet. It also shows the company obligation to settle $ 200,000 with the supplier even invoice is not yet received.