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					                                   Chapter 9


               PURCHASE FLOW


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                                                Table of Contents

Objectives and Course Information ........................................................................................ ii
Small Business Accounting CPE Course Outline ................................................................ iii
Introduction ...............................................................................................................................1
Learning Objectives .................................................................................................................1
Quick Checks ............................................................................................................................1
Purchase Orders ........................................................................................................................9
        Creating the Purchase Order .......................................................................................9
        Delivering the Purchase Order ..................................................................................10
        E-Mailing the Purchase Order ...................................................................................11
        Monitoring Status of Purchase Orders ......................................................................15
Receiving Items against the Purchase Order ........................................................................17
        Receiving Items When there is a Discrepancy .........................................................20
        Voiding Item Receipts ...............................................................................................22
        Tracking the Results of Receiving Items..................................................................23
Creating Bills from Item Receipts .........................................................................................24
Entering Bills ..........................................................................................................................26
Paying Bills .............................................................................................................................27
        Timing.........................................................................................................................27
        Early Payment Discounts ..........................................................................................27
        Using a Dedicated Check Printer ..............................................................................28
Selecting Bills for Payment ...................................................................................................29
Check Printing ........................................................................................................................31
Credit Memos .........................................................................................................................37
Tips for Paying Bills When Cash is Tight ............................................................................40
Conclusion ..............................................................................................................................41
Hands on Learning – Now You Try It ..................................................................................42
Glossary of Terms ..................................................................................................................46
References ...............................................................................................................................46
Test Questions ........................................................................................................................47
Answers to Study Questions and Reinforcing Responses ...................................................51




Purchase Flow                                                                                                                              i
Microsoft Small Business Accounting                                                        Continuing Professional Education
Objectives & Course Information
Learning Objectives               The objectives of this chapter are to educate and to provide
                                  guidance and understanding to CPAs on the process of working
                                  with purchase orders, bills and checks in Small Business
                                  Accounting, and to provide CPAs with the information they need
                                  to better educate and assist their clients with this process.

Course Level                      Overview

Pre-Requisites                    No prerequisites are required.

Advanced Preparation              Before taking this course, the student should first install Microsoft
                                  Office Small Business Accounting 2006. Students are expected to
                                  practice with the product as they study these materials.

Delivery Method                   Self-study materials, product screen shots, examples, case studies,
                                  study questions, and final exam materials.

Recommended CPE Credit            This chapter is part of a 24-chapter CPE course featuring Small
                                  Business Accounting. The 24 chapters are divided into three equal
                                  parts of 8 chapters each. Each of the three parts is recommended
                                  for 8 hours of CPE credit, for a total of 24 hours of CPE credit.

Course Development Date           May 2005. Revised July 2006

                                  AdvisorCPE is registered with the National Association of State
                                  Boards of Accountancy (NASBA) as a sponsor of continuing
                                  professional education on the National Registry of CPE Sponsors.
                                  State boards of accountancy have final authority on the acceptance
                                  of individual courses for CPE credit. Complaints regarding
                                  registered sponsors may be addressed to the National Registry of
                                  CPE Sponsors, 150 Fourth Avenue, Nashville, TN, 37219-2417.




Purchase Flow                                                                                   ii
Microsoft Small Business Accounting                             Continuing Professional Education
Small Business Accounting CPE Course Outline
Microsoft is pleased to provide CPAs with the following CPE series to help you get up to
speed quickly with Microsoft Small Business Accounting. This chapter is part of three
separate 8-hour CPE courses focusing on the Small Business Accounting product. An
outline for all three courses is presented below:

Part I – Setting Up Small Business Accounting
(8 Hours of CPE Credit)
     1 New Company Setup
     2 Backup Procedures & Data Protection
     3 General Ledger & Journal Entries
     4 Customer, Vendor, and Employee Setup
     5 Inventory Setup
     6 Inventory Pricing, Receipts & Adjustments
     7 Financial Reporting I
     8 Financial Reporting II

Part II – Using Small Business Accounting
(8 Hours of CPE Credit)
     9 Purchase Flow
    10 Sales Flow
    11 Cash Flow Projections
    12 Customization
    13 Month End & Year End Procedures
    14 New User Setup & Security
    15 SBA Office Integration
    16 SBA Excel Integration

Part III – Small Business Accounting Advanced
(8 Hours of CPE Credit)
    17 Banking
    18 Budgeting & Planning
    19 Sales Taxes
    20 Managing Customers
    21 Job & Project Costing
    22 Time & Billing
    23 Payroll
    24 Business Services




Purchase Flow                                                                           iii
Microsoft Small Business Accounting                     Continuing Professional Education
Introduction
The most common procedure performed in any accounting system is paying bills and
entering checks. Accounting systems are well suited to not only assist you in this
endeavor, but to also organize the collective payments into a complete accounting system
with general ledger, trial balance, profit and loss reports, and balance sheets. This chapter
will walk you through the various procedures you will need to perform in order to
process purchase orders, bills and checks using the Small Business Accounting system.

Learning Objectives
The learning objectives of this chapter are to help CPAs understand:

      How to produce quick checks in Small Business Accounting.

      Creating purchase orders in Small Business Accounting including delivering and
       tracking purchase orders.

      Receiving inventory items against purchase orders.

      Converting item receipts to bills in Small Business Accounting.

      Paying bills in Small Business Accounting.

      Taking advantage of early payment discounts.

      Printing checks from Small Business Accounting.

      Working with credit memos in Small Business Accounting.

      How to better manage the process of paying bills when cash is tight.
Quick Checks
Let us start our review of Small Business Accounting’s purchase process with the
creation of a quick check. Later we will discuss the more involved process of creating
purchase orders, and entering bills as a prerequisite to writing a check. From time to time,
most companies have a need to write a quick check for a variety of reasons. For example,
let us assume that a local Little League baseball team has dropped by and asked you to
sponsor their team – the Sandpipers. You are proud to support the community and agree
to fund the team with a contribution of $500. In this case, the baseball team does not have
a billing system in which they can later bill you for this amount – rather they expect a
check right away. Additionally, the baseball team is probably not a recurring vendor that
you will need to set up in the system, complete with billing terms, etc. In other words, the
baseball team is most likely a one-time vendor and a quick check is all that is needed to
complete this transaction. In this case, the following procedures would allow you to
complete this process with minimal steps.


Purchase Flow                                                                             9-1
Microsoft Small Business Accounting                         Continuing Professional Education
Start by launching the New Check window by selecting Vendors, New, New Check
from the main men as shown below.




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Purchase Flow                                                                  9-2
Microsoft Small Business Accounting              Continuing Professional Education
                  Figure 9.1 - Creating a New Check in Small Business Accounting

The Check window shown below appears and is ready to accept a new check. The first
step is to select the Bank Account you wish to use to pay these funds. Next, type in the
name of the payee, in this case the Sandpipers Baseball Team. Small Business
Accounting will automatically pop up a new vendor form which will enable you to setup
this new vender. You need not enter any information about the vendor other than the
name of the organization, but additional information such as address and contact
information can be entered if desired. Next, enter a memo which adequately describes the
transaction. A common mistake some bookkeepers make is to fail to provide an
explanation, or the failure to provide an adequate explanation to support the purpose of
the check. Keep in mind that at year end, it might be difficult to recall why this check was
written, or for which season this check applies. Taking care to insert detailed descriptions
on all checks ensures that the accounting records will be easier to read and follow in the
future.

Study Question 9.1- When producing a quick check in Small Business Account, which of
the following procedures is required?

A. You must select the bank account to be used to pay the funds
B. You must call the bank to verify that adequate funds exist to cover the check
C. You must hand write the check and enter it as a journal entry
D. You must complete the process in less than one minute




Purchase Flow                                                                                9-3
Microsoft Small Business Accounting                            Continuing Professional Education
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Purchase Flow                                                               9-4
Microsoft Small Business Accounting           Continuing Professional Education
Complete the transaction by entering the amount of the check and distributing that
amount to the proper account – in this case contributions/donations expense. After
clicking the Save and Close button, your check is ready for printing. To print your check,
launch the check printing window in Small Business Accounting by clicking on the
Printer icon at the top of the check form or by clicking on the Print Checks button on
the Vendors Home Page as shown below.




Purchase Flow                                                                           9-5
Microsoft Small Business Accounting                       Continuing Professional Education
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                    Figure 9.3 – Printing Checks in Small Business Accounting

Purchase Flow                                                                                9-6
Microsoft Small Business Accounting                            Continuing Professional Education
The Select Checks dialog provides a listing of all checks that are ready to be printed, but
you must indicate which checks to print by placing a check mark next to the check or
checks you would like to print. This dialog is shown below, and you can see that the $500
check to the baseball team has been selected for printing.




Purchase Flow                                                                           9-7
Microsoft Small Business Accounting                       Continuing Professional Education
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Purchase Flow                                                               9-8
Microsoft Small Business Accounting           Continuing Professional Education
Clicking on the print button will cause the Windows print dialog box to pop up allowing
you set various print options before printing as shown below.




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                           Figure 9.5 – The Check Printing Dialog Box

Purchase Flow                                                                               9-9
Microsoft Small Business Accounting                           Continuing Professional Education
In this dialog box you are able to select the specific printer to which you wish to print as
shown below.




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Purchase Flow                                                                          9-10
Microsoft Small Business Accounting                        Continuing Professional Education
                   Figure 9.6 – Selecting a Printer in the Print Checks Dialog Box

In addition, you can also choose between voucher checks and standard check formats,
and adjust the alignment of the printer paper when printing to pre-printed forms.




                   Figure 9.7 – The Alignment for Pre-Printed Forms Dialog Box
In the event that the printed check does not line up properly in the check’s data fields,
you can adjust the vertical and horizontal alignment by one character width at a time.
Finally, the print option dialog box also allows you to set the properties for this particular
print job. The properties you see will depend upon the specific printer you are using. In
the example shown below, we are printing to a Hewlett Packard LaserJet 4100, and the
print options associated with this printer include an option to print multiple copies of a
check. This feature may be useful for those companies who file multiple copies of
checks. For example, some contractors make multiple copies of all checks and file them
in the appropriate job folders to support the costs of items purchased for that particular
job. This feature is shown below.




Purchase Flow                                                                                 9-11
Microsoft Small Business Accounting                               Continuing Professional Education
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Purchase Flow                                                             9-12
Microsoft Small Business Accounting           Continuing Professional Education
Once the check is printed, Small Business Accounting will ask you to confirm that the
check printed properly by closing the select check window, or you can reprint the check
again in case it did not print properly. Once the transaction is complete, the resulting
transaction can be viewed in the general ledger as shown below.




                      Figure 9.9 – The Transaction Detail by Account Report

Study Question 9.2- Which of the following are valid checks printing options supported
by Small Business Accounting and the Windows Print Manager?

A. Number of checks to be printed
B. Type of check format to be used in printing the check
C. Destination printer
D. All of the above




Purchase Flow                                                                              9-13
Microsoft Small Business Accounting                            Continuing Professional Education
Purchase Orders
Now that we have learned how to print a quick check, let’s take a look at the more
complex purchasing process. Most businesses order frequently purchased items such as
inventory and supplies by placing the order over the telephone, through the fax or via e-
mail. These situations call for the creation of a purchase order in your accounting system
in which you record the purchase order, and then transmit the purchase order to the
vendor. The following example will walk you through the complete purchasing process,
beginning with the creation of a purchase order to the completion of the process by
writing a check. To start the process, launch the New Purchase Order window by
clicking on the New Purchase Order button on the Vendor Home Page as shown
below.

Creating the Purchase Order




                          Figure 9.10 – The New Purchase Order Button

In this example, the company is placing an order with the Season Sports Company for 12
hiking boots. The company currently has 18 hiking boots in stock as shown below on the
purchase order line item for hiking boots, but the company expects increased demand for
hiking boots due to an upcoming charity event called Hike for Life.




Purchase Flow                                                                            9-14
Microsoft Small Business Accounting                          Continuing Professional Education
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Purchase Flow                                                             9-15
Microsoft Small Business Accounting           Continuing Professional Education
                Figure 9.11 – The Purchase Order form in Small Business Accounting

The company uses the Small Business Accounting purchase order system to create
purchase orders for all ordered goods. Why use a purchase order system at all, one might
ask? Why not just order goods and pay for them when they arrive? Without a purchase
ordering system, a company might not know which items have been ordered, and which
ones have not. In this situation it might be possible for company representatives to double
order items which would result in too much inventory on hand. On other occasions,
company representatives may think that replenishment quantities of an item have been
reordered when in fact they have not been. A purchase order system enables a company
to instantly see what has been ordered and track the status of those orders.

Another benefit of using a purchase order system is it makes it easier for companies to
pay bills. For example, if a company receives an invoice for which there is no
corresponding purchase order, then the company can immediately suspect that the invoice
is erroneous. By only paying invoices for goods which match a current purchase order, a
company can avoid paying for goods they never ordered.

Delivering the Purchase Order

The next step in the purchase ordering process is to send the purchase order to the
intended recipient – the vendor whom you wish to fulfill the order. As mentioned above,
this task can be accomplished many ways. The company could print the order and mail it
to the vendor. The company could also print the order and fax it to the company. Yet
another method is to call the vendor and provide the purchase order information to the
vendor over the telephone. All of these purchase order delivery methods are widely used
today; however, all three of these methods can be very costly.

Consider the process of using the U.S. Mail to deliver the purchase orders. In this case
the purchase order must be printed; and an envelope must be addressed, stamped, stuffed,
and sealed and then delivered to the mail box. This process is labor intensive and once
the letter is mailed, it can take days to arrive at its destination. Upon arrival, the letter
must be opened and the purchase order information must be entered into the system
manually. This type of re-keying of the data can lead to inherent keypunching errors.
Realistically it takes about 5 business days for a purchase order to flow through this slow
moving, labor intensive, error susceptible process. Multiply this inefficient process by
hundreds of purchase orders a year and you can begin to see how costly this method can
be. Considering that the same purchase order could have been sent through e-mail in
about 5 seconds, thereby reducing out-of-pocket costs for envelopes, stamps, paper and
printer toner, it is easy to see that the e-mail method is far less expensive. In addition, the
e-mail method involves far less labor, can avoid inherent keypunching errors, and results
in much faster communications. All of these factors lead to higher company profitability
and greater customer satisfaction.



Purchase Flow                                                                              9-16
Microsoft Small Business Accounting                            Continuing Professional Education
While faxing or phoning a purchase order to a vendor results in quicker delivery, these
two options are perhaps more expensive and costly to your company than using the U.S.
mail method described above. The reason is that the process of phoning or faxing an
order into a vendor can be labor intensive. For example, phoning in a purchase order can
involve a long distance telephone call, and the order clerk may have to navigate a lengthy
phone menu in the vendor’s voice mail system. The vendor’s order taker may or may not
be available at that very moment. In some cases, the order taker may place your order
clerk on hold. Once the two parties are communicating, it is common for them to
exchange a certain amount of social conversation such as “Hello Roger, how was your
weekend? It was great, we went fishing and caught 12 bass”. While such interactions can
have positive relationship building affects, it also eats valuable time and productivity.
Considering that the average order clerk salary is approximately $34,500 (1), the per hour
cost of that person is almost 28 cents per minute, or 36 cents per minute if you include
fringe benefits and the cost of office space. Because labor is the number one controllable
cost for almost every organization, every attempt should be made to promote labor
efficiency in the workplace.

While the fax delivery method avoids social banter, this method has its own shortcomings
as well. Consider that fax machines are not always available – on occasion employees
must wait in line, or wait on incoming faxes before they can send their outgoing fax.
Additionally, the fax method typically involves a long distance telephone call, and once
received the purchase order information must be re-keyed by the recipient. Also there
may be a time delay in the delivery of the faxed document to the intended recipient. As
mentioned above, the process of re-entering data leads to time lag, delays, and inherent
keypunching errors.




Purchase Flow                                                                         9-17
Microsoft Small Business Accounting                       Continuing Professional Education
E-Mailing the Purchase Order

For all of these reasons, companies should strive to employ the e-mail method of
delivering purchase orders to the intended vendors. The steps below depict this process.




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                            Figure 9.12 – E-Mailing Purchase Orders

Upon clicking the e-mail icon on top of the purchase order form, the following e-mail
will appear in a Microsoft Word template format. In this format, you can insert a subject,
insert text to accompany the purchase order, and copy other persons, such as yourself, on
the document.



Purchase Flow                                                                             9-18
Microsoft Small Business Accounting                           Continuing Professional Education
Study Question 9.3- According to the materials, which of the following delivery
methods is considered to be the best method of delivering purchase orders to vendors?
A. Certified U.S. Mail
B. Through a fax machine with receipt request
C. Hand delivery
D. Via the telephone
E. Using e-mail




            Figure 9.13 – Example Purchase Order Template in Word with E-Mail Options

By copying yourself, you can create an easy to access archive of all sent purchase orders
in your e-mail folder. This will provide you with a date and time stamp as to when the
purchase order was sent. Also, because you successfully received a copy of the purchase
order yourself; you are assured that your system is sending out purchase orders properly.
In the event that your vendor does not receive a particular purchase order, or requests
another copy of a purchase order, maintaining an archive in your e-mail system makes it
easy to forward another copy of the purchase order to the vendor.

When the purchase order is received by the vendor it will appear as shown below.

Purchase Flow                                                                              9-19
Microsoft Small Business Accounting                            Continuing Professional Education
                        Figure 9.14 – Example of Purchase Order Received

Of course some companies do not receive e-mails using HTML text, and instead they
only use plain text formats. In this case, the resulting purchase order will appear as
follows:




Purchase Flow                                                                             9-20
Microsoft Small Business Accounting                           Continuing Professional Education
                  Figure 9.15 – Example of Purchase Order Received in Plain Text

Since this format is more difficult to read, you should communicate with your vendors to
make sure that they are reading your e-mailed purchase orders in rich text format or
HTML format. Some companies prohibit the use of HTML based e-mails in order to
prevent inappropriate images from being received by employees. However, inappropriate
images can be and should be blocked by other means; therefore, there really is no
significant reason why a company should not receive e-mails in HTML formats.




Purchase Flow                                                                               9-21
Microsoft Small Business Accounting                             Continuing Professional Education
Monitoring Status of Purchase Orders

Once the purchase order has been created and submitted to the vendor, all the company
needs to do is wait for the shipment to arrive. In the mean time, Small Business
Accounting reports the amount of items on hand including the amount of items on order
and pending. For example, the form below shows that while there are 18 hiking boots on
hand, there are 60 total hiking boots on order, including the 12 ordered in the example
above.




               Figure 9.16 – Tracking Purchase Order Information in the Item Window

In addition, this information is also available on the Inventory Stock Status report that
can be accessed by selecting Reports, Inventory, Inventory, Stock Status By Item
Report from the main menu. As shown below, this report includes information for items
on hand, on purchase order, and on sales order.




Purchase Flow                                                                              9-22
Microsoft Small Business Accounting                            Continuing Professional Education
         Figure 9.17 – Tracking Purchase Order Information in Inventory Stock Status Report




Purchase Flow                                                                                9-23
Microsoft Small Business Accounting                              Continuing Professional Education
Receiving Items against the Purchase Order
As goods and shipments arrive, the warehouse workers should receive these items into
inventory – ideally at the time of receipt. Many companies operate their accounting
system on a single computer, which frequently means that the company must receive
items and enter those receipts at a later time. This method of receiving and recording
inventory can cause problems and generally should be avoided. The most desirable
situation is to provide warehouse workers with their own computer system running Small
Business Accounting. Since desktop computers are now priced less than $500, wireless
networking technology costs less than $200, and Small Business Accou nting
accommodates up to 5 concurrent users, implementing this type of multi-user system is
very affordable. The benefits derived from operating a multi-user system will typically
pay for itself through greater efficiencies and better information.

For example, consider that a warehouse worker has just received a shipment of lamps in
the warehouse. A few minutes later, a customer calls wanting to order ten of those lamps
right away. Without a real time system, the order clerk may be unaware that the
warehouse now has these lamps in stock. Even if the order clerk makes the effort to walk
to the warehouse and personally check on the status of the lamps, these efforts may be in
vain since the lamps may not yet be stocked on the correct shelf or bin. Further, the
warehouse worker who received the inventory may be out for lunch or parking a truck.
There are a number of reasons why the order clerk may be unable to accurately confirm
the true status of the number of lamps in stock, even if costly labor intensive methods are
used to check on inventory status. This situation can lead to lost sales.

By contrast, if the company provides the warehouse worker with the appropriate
warehouse workstation, goods can be checked into the system quickly as they are
unloaded from the truck. This step will enable warehouse workers to check the items
being unloaded to the purchase orders in the system, and perhaps detect incorrect
shipments or deliveries in time to refuse the shipment. Assuming that the shipments are
correct, the process of receiving items into the system at the earliest possible moment
allows order clerks to know exactly how many of each particular item is held in inventory
and on purchase order. Armed with this information, order clerks are better able to take
orders and promise deliveries without over promising more than they can deliver.

To start the process of receiving items into inventory, launch the Purchase Order List
by clicking on the Purchase Orders button under the Find section on the Vendor Home
Page. The following screen will appear.




Purchase Flow                                                                         9-24
Microsoft Small Business Accounting                       Continuing Professional Education
                Figure 9.18 – The Purchase Order List in Small Business Accounting

Select the purchase order that corresponds with the goods being received by double
clicking on that item. This action will cause the individual purchase order to be displayed
on screen as shown below.




                Figure 9.19 – Example Purchase Order in Small Business Accounting




Purchase Flow                                                                              9-25
Microsoft Small Business Accounting                            Continuing Professional Education
Next, click the Receive Items button at the top of the purchase order to display the Item
Receipts form shown below.

Study Question 9.4- According to the materials, when is the best time for received
inventory items to be entered into the accounting system?

A. Item receipts should be entered into the system each Monday morning so that accurate
amounts are reflected all week
B. Items receipts should be entered only after the vendor bills are paid in full
C. Item receipts should not be entered until the items are actually sold
D. Item receipts should be recorded as they are delivered into the warehouse, or as soon
as possible thereafter




            Figure 9.20 – Example Item Receipt that was converted from a Purchase Order

Assuming that the quantities and amounts received agree with the amounts and quantities
included on the purchase order, you need only click on the Save and Close button on the
toolbar to complete the Item Receipt Process.

Receiving Items When there is a Discrepancy


Purchase Flow                                                                               9-26
Microsoft Small Business Accounting                             Continuing Professional Education
However, if there is a discrepancy between the amounts received and the amounts shown
on the purchase order, then you will need to take a slightly different approach as follows.
In the Item Receipts form, you should override any and all amounts to reflect the correct
amounts before saving the Item Receipt. For example, the Item Receipt form shown
above indicates that 12 pairs of hiking boots costing $767.88 is expected to be received.
However, let us assume that instead, we only receive 10 pairs of hiking boots and the
total bill is for $700. While these discrepancies are worrisome and no doubt will require
investigation and action, in Small Business Accounting the proper procedure is to record
the actual quantities and amounts received. Just change the quantity received on the item
receipt and Small Business Accounting treats the transaction as a partially received
shipment as shown in the item recipt below.




                  Figure 9.21 – Example Item Receipt for part of a Purchase Order

If you only recive part of the purchase order as seen above, the status of the purchase
order changes to Partially received:




Purchase Flow                                                                               9-27
Microsoft Small Business Accounting                             Continuing Professional Education
                         Figure 9.22 – Partially Recived Purchase Order




Purchase Flow                                                                              9-28
Microsoft Small Business Accounting                            Continuing Professional Education
Voiding Item Receipts

If for some reason you post the Item Receipt without making the necessary adjustments
to the amounts, or in error, you can reverse that Item Receipt by launching the
Bills/Item Receipts list by selecting Bills and Item Receipts from the Vendor’s Home
Page.




                 Figure 9.23 – Voiding Item Receipts in Small Business Accounting

This procedure will void the item receipt and reinstate the purchase in the system as it
was before the Item Receipt was recorded.




Purchase Flow                                                                              9-29
Microsoft Small Business Accounting                            Continuing Professional Education
Tracking the Results of Receiving Items

Once the Item Receipt has been saved in the system, the revised quantities on hand and
amounts will be displayed throughout the system. For example, if the number pf hiking
boots on hand were 38 with 48 on purchase order, then voiding the Item Receipt for 10
pairs of hiking boots would decrease the number of hiking boots on hand to 28, and
increase the number on purchase order to 58.




        Figure 9.24 – Tracking the Results of a Voided Purchase Order in the Inventory Window

The item receipt is posted to inventory account as well as to the Pending Item Receipts
account, which is a current liability account. The assumption is that the items have been
received, but the bill has not arrived yet. The pending item receipts account correctly
accounts for the liability without affecting the vendor balance or aging.




Purchase Flow                                                                                9-30
Microsoft Small Business Accounting                              Continuing Professional Education
Creating Bills from Item Receipts
Now that you have received inventory into stock, at some point you will receive the bill
associated with that receipt of goods from the vendor. Small Business Accounting allows
you to convert the Item Receipt into a bill as shown below. This procedure offers two
advantages. The first advantage is that there is no need to re-enter information into the
Small Business Accounting system when the vendor invoice is received in the mail.
Because all of the necessary information is already entered into the system as an Item
Receipt, converting that receipt to a bill requires only a click of the mouse. Additionally,
by converting a valid Item Receipt to a bill, you ensure that you will be paying for goods
that were actually received. If you receive a vendor invoice through the mail, and then
enter that invoice into the Small Business Accounting system, you run the risk of not
being able to easily confirm the receipt of those goods without a great deal of labor
intensive leg work.




                        Figure 9.25 – Creating a Bill from an Item Receipt

To convert the Item Receipt shown above to a bill, simply click on the Create Bill icon
as shown at the top of the Item Receipt. This action will convert the Item Receipt to an
unpaid bill as shown below.


Purchase Flow                                                                               9-31
Microsoft Small Business Accounting                             Continuing Professional Education
                  Figure 9.26 – Unpaid Vendor Bill Created from an Item Receipt

The conversion of the item recipt to a bill will void the item receipt and create a bill
instead. This will reverse the entry to Pending Item Recipts and post the bill to
Accounts Payable for the vendor in question.

At this time, we have now created a bill in the Small Business Accounting system that is
awaiting payment. In most circumstances, the vendor will send an invoice to the
company for this amount, and upon receipt of this invoice, the company will need only
compare the vendor invoice to the unpaid bill already in the system. If you receive a
vendor invoice that has not already been entered into the system, the proper procedure is
to enter the bill using the Small Business Accounting Enter Bills window. This
procedure is discussed below.




Purchase Flow                                                                              9-32
Microsoft Small Business Accounting                            Continuing Professional Education
Entering Bills
Often bills (invoices received from vendors) are received in the mail from vendors for
which no purchase order has been created in the system. In this case, these bills must be
entered into the system as received using the Enter Bills window. To access this window,
click on the Enter Bills button on the Vendor’s Home Page as shown below.




                     Figure 9.27 – Entering Bills in Small Business Accounting

The process of entering bills is almost identical to that of entering a purchase order,
except that there is no need to capture a shipping address, shipping method, or shipping
terms. In essence, if you know how to enter a purchase order, then by definition you
already know how to enter an invoice.

Unlike the item receipt, the bill affects the Accounts Payable account right away and
will appear in the aging reports.




Purchase Flow                                                                               9-33
Microsoft Small Business Accounting                             Continuing Professional Education
Paying Bills




                     Figure 9.28 – Paying Bills in Small Business Accounting

So far in this chapter we have discussed the process of entering bills (or vendor invoices)
into the Small Business Accounting system. Let us now proceed to the process of paying
those bills that have been entered. Presented below is a discussion of various issues that
will impact the bill paying function.

Timing - The first discussion point is to address the timing of paying bills. It is
inefficient to pay bills and write checks on a continuous basis; therefore most companies
choose to pay bills on a schedule, such as once (or twice) a week on Thursday morning
for example. By establishing a routine schedule for check writing, the accounts payable
clerk and other company officials will work more methodically, instead of in a haphazard
manner. Bookkeepers who print checks steadily throughout the day not only create
inefficiencies in their workload, but they promote disorganization, expose checks to
greater risk, and place other company officials in a position to either sign and process
checks immediately or leave them laying around out of sight and out of mind. The best
approach is to select bills for payment and print checks at the same time each week, and
then deliver those checks to the appropriate company official for signing and mailing. In
this manner less time is wasted, organization is promoted, and there is less chance of
checks going unsigned, unprotected, or undelivered.

Early Payment Discounts – In situations where the company has adequate funds to do
so, it is almost always advisable to take advantage of early payment discounts. The
standard in the industry is to take a 2% discount on bills that are paid within 10 days of
the receipt of the vendor invoice. This payment term is known as “2% 10 days, net due
30”. In this case, paying a bill just 20 days early in order to earn a 2% discount is
equivalent to earning 36.5% interest on those monies (computed as 2% divided by 20
times 365 days per year = 36.5%). Only companies who are strapped for cash would miss
this opportunity; and even then, it would most likely be advantageous for cash starved
companies to borrow funds at prevailing interest rates in order to take advantage of a 2%
early payment discount.




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Using a Dedicated Check Printer – It is best to set up a single printer devoted
completely to the check writing function, rather than to use the same printer for printing
letters, reports, checks etc. The reason is this approach promotes organization, saves time,
and reduces costs. When only one printer is used, the payables clerk must constantly
switch back and forth between check forms, plain paper, and letterhead. When differing
types of paper are used in a printer, it is easier for someone to accidentally print their
document onto the check form paper stock – especially in a shared printer environment.
This error leads to unused check numbers in an accounting system and this is considered
to be sloppy bookkeeping by many. Further the constant switching of paper makes it
more difficult to keep up with and feed the correctly numbered checks. With the cost of
printers starting at less than $100, this method makes sense even in the smallest of
companies. For larger companies where check writing volume is greater, the
implementation of a dedicated printer specifically for the purpose of writing checks is
even more important.

Additionally, checks today should be printed on laser jet printers or ink jet printers only
as the use of dot matrix printers is virtually obsolete. The reason dot matrix printers are
obsolete when it comes to check printing is because dot matrix printers are slow, the
continuous form feed check stock is more expensive and time consuming to feed, and the
process of tearing away the perforated edges is labor intensive.

Study Question 9.5- When should a company take advantage of early payment
discounts?

A. Only during the shorter months of the year
B. When the vendor has been over billing your account
C. When ever possible and cash flow permits
D. Only when your current ratio is greater than 1:1




Purchase Flow                                                                          9-35
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Selecting Bills for Payment
The next step in the bill payment process is to select bills for payment. In this situation it
is normal for companies to have a lengthy list of bills to be paid entered into the system.
However, most companies do not pay all of their outstanding bills at each check writing
session; instead only those bills that are nearing their due date are selected for payment.
Even companies with plenty of funds on hand stretch their dollars by waiting until the
last possible moment to pay their bills – thus maximizing their float and interest earnings.
For those companies that are strapped for cash, tough decisions must be made regarding
which vendors to pay over others; or deciding which invoices should be paid short, or not
at all. These are all factors that affect the bill selection process. To begin this process,
launch the Pay Bills window by clicking on the Pay Bills button on the Vendor Home
Page. The Pay Bills window is shown below.




                 Figure 9.29 – The Pay Bills Window in Small Business Accounting

Notice that in the Pay Bills window shown above, the data can be sorted merely by
clicking on the column heading. For example, to view the bills to be paid in order of their
due dates, click the top of the Due Date column. Alternatively, a company may choose to
sort by Cash Discounts or Discount Date in order to identify those bills which can be
paid immediately to earn the early payment discount.

Purchase Flow                                                                              9-36
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As shown above, you need only place a check mark next to the bills you would like to
pay, and the accumulated total amount of bills selected is shown in the upper right hand
corner. An example of the bill selection process is shown below. Notice that in this
example, the selection is taking place on April 7, 2005, and the user has sorted the list by
due date and selected all of those bills that will come due before the next scheduled bill
payment session which is scheduled to take place the following week on April 14, 2005.
In this case, ten bills totaling $16,572.00 have been selected for payment out of a total
amount of outstanding payables of $45,399.01. After paying these bills we see that the
company will be left with $136,275.87 in the checking account.




                   Figure 9.30 – Example Pay Bills Window with Bills Selected

Clicking on the Save and Close button at the top of this window will complete the bill
selection process. These selected bills are now ready for payment.




Purchase Flow                                                                             9-37
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Check Printing
The next step in the bill payment process is to print the checks. This process is started by
launching the Print Checks window by clicking on the Print Checks button on the
Vendor’s Home Page. This action will display the following window:




               Figure 9.31 – The Select Checks Window in Small Business Accounting

As mentioned above, the Select Checks dialog provides a listing of all checks that are
ready to be printed, and you must indicate which checks to print by placing a check mark
next to the check (or checks) you would like to print. This dialog is shown above and in
this example, all outstanding checks totaling $22,284.24 have been selected for printing.
At this point, clicking on the print button will cause the Windows print dialog box to pop
up allowing you set various print options before printing as shown below.




Purchase Flow                                                                              9-38
Microsoft Small Business Accounting                            Continuing Professional Education
                 Figure 9.32 – The Print Dialog Box in Small Business Accounting

In this Print dialog box you are able to select the specific printer to which you wish to
print as shown below.




                      Figure 9.33 – Selecting a Printer in the Print Dialog Box

Additional buttons on the Print dialog box allow you to choose between voucher checks
and standard check formats, and adjust the alignment of the printer paper when printing
to continuous form fed paper. These options are shown in the two dialogs below.

Purchase Flow                                                                                 9-39
Microsoft Small Business Accounting                               Continuing Professional Education
                         Figures 9.34 & 9.35 – Print Option Dialog Boxes

Notice the option presented above (to the left) that the user can also indicate how many
checks are to appear on each page. This option accommodates the printing of single page
checks, or three checks per page.

As mentioned earlier in this chapter (Quick Checks), when printing to continuous form
fed checks, if the check form does not line up properly with the printed data fields, you
can adjust the vertical and horizontal alignment by one character width at a time using the
options shown above and to the right.

The print option dialog box also allows you to set the properties for this particular print
job. The properties you see will depend upon the specific printer you are using. In the
example shown below, we are printing to a Hewlett Packard LaserJet 4100, and the print
options associated with this printer include an option to print multiple copies of a check.
This feature may be useful for those companies who file multiple copies of check. For
example, some residential home contractors find it useful to make multiple copies of all
checks and file them away in the appropriate job folders to support the costs of items
purchased for that particular house. This feature is shown below.




Purchase Flow                                                                              9-40
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                         Figures 9.36 – The Print Properties Dialog Box

Once the checks are printed, Small Business Accounting will ask you to confirm that the
checks printed properly. At this juncture, you can close the Select Check window if all
checks printed correctly, or you can reprint the check again in case it did not properly
print. Once the transaction is complete it is recorded throughout the Small Business
Accounting system. For example, you can now see these transactions in the check
register as shown below.




Purchase Flow                                                                              9-41
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        Figures 9.37 – The Checking Account - Account Register in Small Business Accounting

For example, the account register above shows that check number 1016 payable to All
Seasons Sports Supply in the amount of $556.52 was just printed and posted in Small
Business Accounting. Double clicking on this line item will cause Small Business
Accounting to drill down to the underlying payment as shown below.




Purchase Flow                                                                               9-42
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               Figures 9.38 – Example Vendor Payment in Small Business Accounting




Purchase Flow                                                                             9-43
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Credit Memos
Small Business Accounting also supports the creation of credit memos which are used to
offset bills to be paid. For example, assume that you receive a shipment of items from a
vendor, and you find that some of these items are slightly damaged. In this case you call
the vendor to discuss the matter and you both agree that the best course of action will be
for your company to keep the slightly damaged merchandise in exchange for a reduction
in the purchase price. This is commonly referred to as a credit memo.

To create a credit memo, select the New Credit Memo button on the Vendor’s Home
Page. This action will launch the Vendor Credit Memo window shown below.




               Figures 9.39 –Vendor Credit Memo form in Small Business Accounting

There are two types of vendor credit memos: Credit memos which give you a discount
for whatever reason and credit memos for damaged items which have to be discarded
from inventory. Note that if a credit memo contains any inventory items, these will be
removed from inventory.

In the Vendor Credit Memo window, select the vendor and indicate the accounts or
items to which the credit memo applies, and assign a dollar amount to each account item.

Purchase Flow                                                                             9-44
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In order to use the credit memo, the company simply selects the Credits button in the
Pay Bills form shown below, and applies this credit against an individual bill to be paid.
This activity is shown below.




                  Figures 9.40 – Applying a Credit Memo in the Pay Bills Window

Above we see that the payables clerk has selected a bill in the Pay Bills window related
to All Seasons Sport Supply and clicked on the Credits button. Upon applying the credit
memo, the bill in question is automatically reduced to reflect the credit memo. As shown
in the check form below, the credit memo amount automatically appears on the printed
check so that the vendor will understand why the amount of the check was reduced from
the original amount.




Purchase Flow                                                                              9-45
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                Figures 9.41 – Example Vendor Payment with Credit Memo Applied




Purchase Flow                                                                            9-46
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Tips for Paying Bills When Cash is Tight
As you tackle the process of paying bills when funds are limited, there are measures you
can take to help keep you organized, and help you make the best decisions regarding the
management of those bills. Presented below are a few tips regarding the bill payment
process.

   1. Enter all bills as received on a daily basis. You can manage your bills better when
      you keep them organized in a single location – your Small Business Accounting
      system.

   2. If you are unable to pay all of your bills, prioritize your bills and attend to the
      highest priority bills first. It is better to make small payments on each bill, rather
      than pay some bills in full while totally ignoring others. Payroll taxes and other
      federal and state taxes should be highest on your priority list.

   3. Pay the rent or the mortgage first because you could face eviction or a great deal
      of hassle if the rent is not paid on time. Most landlords will grant you a grace
      period and then tack on late fees.

   4. Keep utility bills current. Without utilities you could be completely out of
      business. In most cases, your utilities will not be disconnected for at least 60 days
      past the due date. There is almost always a fairly stiff reconnection fee, and this
      should be avoided if possible.

   5. Don’t hide from your creditors. It is better to explain your payment plans and ask
      for their cooperation. Assure your creditors that they will be paid in full and give
      them some idea when they will be paid in full.

   6. Stick to your new payment plan. If you are not consistent, the vendor might take
      legal action. You can avoid hassles with consistent and open communication.

   7. Keep in mind that late payments will be reported to the credit bureau.

   8. If your company has any credit card balances due, you should at least pay the
      minimum payment required, and the interest rate charged. If you have more than
      one credit card balance due, you should sort then in ascending order starting with
      the highest interest rate charge and pay off the highest rate first and continue to
      pay the minimum on the others.




Purchase Flow                                                                          9-47
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Conclusion
This chapter focused on the process of creating purchase orders, paying bills, and writing
checks. We also covered credit memos and tips for paying bills when cash is tight. Using
examples and discussion, this chapter presents the steps necessary for managing the
purchase and payment process in Small Business Accounting. For additional information
related to the bill payment process, please refer to the chapters on Banking and Cash
Flow Projections.




Purchase Flow                                                                         9-48
Microsoft Small Business Accounting                       Continuing Professional Education
                   Chapter 9 – Purchase Flow
                Hands on Learning – Now You Try It
Complete the following assignment: Follow the steps presented below to create a new
purchase order in Small Business Accounting, receive items against that purchase order,
convert the purchase order to a bill, select the bill for payment, and print the check.

   1. In the sample company, launch the Purchase Order window by selecting
      Vendors, New, New Purchase Order from the main menu. Enter the information
      shown below and select Save and Close from the main menu.




   2. Open the Purchase Order List by clicking on the Purchase Orders button on
      the Vendor’s Home Page. Double click on the newly created purchase order line
      item to display the newly created purchase order as shown below.




Purchase Flow                                                                        9-49
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   3. Click on the Receive Items button at the top of the purchase order to display the
      Item receipts window. Click the Save and Close button to record the item receipt.

   4. Open the Bills/Item Receipts List by clicking on the Bills and Item Receipts
      button on the Vendor Home Page. Select the newly created item receipt by
      double clicking on the newly created item receipt line item. The following
      window will be displayed:




Purchase Flow                                                                       9-50
Microsoft Small Business Accounting                     Continuing Professional Education
   5. Next click on the Create Bill button located at the top of the Item Receipt. Click
      the Save and Close button to record this bill.

   6. Next launch the Pay Bills window by selecting Vendors, Pay Bills from the main
      menu. Select the newly created bill for payment as shown below. Click the Save
      and Close button to record bills selected for payment.




Purchase Flow                                                                        9-51
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   7. Launch the Print Checks window by clicking on the Print Checks button on the
      Vendor Home Page. Select the check for payment and print the check.

   8. Review your check for accuracy.

   9. Launch the Checking Account - Account Register by selecting Banking,
      Account Register from the main menu. Review the newly created check
      transaction in this report and then double click on this line item to drill down into
      the actual check. Review the reports.




Purchase Flow                                                                          9-52
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Glossary of Terms

      Credit Memo – This term refers to an agreement between a customer and
       supplier in which the supplier allows the customer to pay a lesser amount than
       previously negotiated.

      Item Receipt – This term refers to the process of receiving inventory or goods
       into a business as shipped from a supplier.

      Purchase Order – An order created by a company for goods and/or services and
       delivered to a supplier for fulfillment.

      Quick Check – The process of producing a check quickly in the accounting
       system, rather than going through the more involved vendor setup, bill entry,
       check selection, and check printing process.


References

      Average Salaries for Admin Support Staff – 2004
       http://www.iaap-hq.org/ResearchTrends/Salaries2004.htm

      Tips For Paying Bills, WomenOF.com
       http://www.womenof.com/Articles/mm020998.asp




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                         Test Questions
                                        Chapter 9
                                      Purchase Flow

                   Microsoft Small Business Accounting




Purchase Flow                                                               9-54
Microsoft Small Business Accounting             Continuing Professional Education
Test Question 9.1
Answer: A
Before you can print a check in Small Business Accounting, which of the following
procedures must first be performed?
A. The check must first be selected for printing for the Select Checks Window
B. You must apply any credit memos against the balance before printing
C. You must load the printer with check printing fluid
D. You must have an authorized supervisor approve the transaction in the Check
transaction approval dialog

Test Question 9.2
Answer: C
Which of the following is a valid description of a purchase order?
A. An order by the President or CFO of the company to purchase inventory
B. A document or sales agreement establishing a valid business relationship between
trusted business parties
C. An order created by a company for goods and/or services and delivered to a supplier
for fulfillment
D. All of the above
E . None of the above

Test Question 9.3
Answer: B
Which of the following best describes the complete bill paying process in OA?
A. Create purchase orders; convert to bills; receive items; and pay bills.
B. Receive purchase orders from vendors; convert to item receipts; pay bills.
C. Request items; receive purchase orders; convert purchase orders to bills; pay bills.
D All of the above
E. None of the above

Test Question 9.4
Answer: B
When receiving inventory, what is the correct action to take when there is a discrepancy
between the number of units actually received and the number of units shown on the
corresponding purchase order?
A. Reject the entire shipment.
B. Record the actual quantity received on the Item Receipt window.
C. Revise the purchase order in question using OA’s built in purchase order alterations
tool kit.
D. Take photographs of the shipment to document the short shipment.




Purchase Flow                                                                          9-55
Microsoft Small Business Accounting                        Continuing Professional Education
Test Question 9.5
Answer: C
According to the materials, when should bills be paid?
A. All bills should be paid immediately upon receipt to establish a good credit rating.
B. Bills should be paid twice each day, once in the morning and again in the afternoon.
C. Bills should be paid on a routine schedule, such as once or twice a week, in order to
promote efficiency.
D. Bills should generally be paid 60 days after receipt in order to maximize cash flow.




Purchase Flow                                                                        9-56
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DOCUMENT INFO
Description: Example of Purchase Order document sample