Accounting for Purchase Orders

The requisitions from the warehouse personnel are converted to purchase orders by the buyers. Purchase orders are created in the Purchasing module. Purchase orders create encumbrances that are posted to the GL during the nightly offline procedure. An Encumbrance (83XXXX) account is debited and a Reserve for Encumbrance (830000) account is credited for the amount of the purchase order. If the quantity ordered is not the same as the quantity requisitioned, then the on-order quantity in the Inventory module is adjusted to the quantity ordered.

For example, your agencys buyer converted the requisition for antiseptic burn ointment to a PO. On the PO, the buyer recorded the unit price of a tube of ointment as $2 per tube. The $19 commitment made previously against the AFF is reversed. A PO encumbrance is now created for $20 (i.e., 10 tubes at $2 each) which is posted to the GL during the nightly offline procedure. The on-order quantity remains 10 in this example.

What Charges Should be Included in the PO Unit Price?

In the NCAS Purchasing module, the buyer records tax, freight and other additional costs separately from the PO unit price. For inventory valuation purposes, the NCAS includes tax as part of the PO unit price. The system does not, however, include freight, additional costs or discounts as part of the PO unit price.

However, in the Accounts Payable (AP) module, freight, additional costs and discounts are included in the invoice unit price because these values are prorated across invoice lines. The inventory value, therefore, does not include freight, additional costs and discount until the invoice is paid, which could be 30 or more days after goods have been recorded as received. Therefore, between the time of receipt and that of payment, the item will be issued to customers at a weighted average cost that excludes freight, additional costs and discount.

To ensure that inventory is received and recorded at its full delivered cost, the buyer should include freight, additional costs and discount in the PO unit price for the item. In other words, the buyer should increase the vendors quoted net price by the amount of the freight and additional costs. If a discount is offered on an item, the buyer can include the discounted price instead of the gross price on the PO line.

If the buyer does not include freight, additional costs and discounts in the PO unit price, a difference will exist between the PO unit price and the invoice unit price. This difference is referred to as a variance. The NCAS recognizes variances at the time of the actual payment of the invoice.

Accounting System Home Page | Information Guide Home Page | OSC Home Page