Coding and approving a bill
One supplies invoice coded to two accounts, and the approval matrix that decides who signs: limits by amount, and the two rules that hold at every limit.
A bill is a request to move money, and two decisions are made at the desk before anything is paid. Where does the cost belong? That is coding. Who says it is right? That is approval. Both are cheap to get right when the bill arrives and expensive to find wrong at year end. Northwind's supplies invoice OW-5521 is the example: one invoice, three lines, two accounts.
The total is $819, but it does not go to one account. The cartons and the label printer are supplies: the printer costs far less than Northwind's $2,500 capitalization threshold, so it is expensed, not set up as an asset. The freight was paid to bring drills to the stockroom, and the cost of inventory includes what it takes to get goods to where they will be sold, so that line is coded to 1300, not to an expense. Splitting by line is the point of a bill form that codes per line, not per bill.
OW-5521: cartons, label printer and drill freight
| Account | Debit | Credit |
|---|---|---|
| 6700Equipment and supplies expense | 639.00 | |
| 1300Inventory | 180.00 | |
| 2000Accounts payable | 819.00 | |
| Balanced | 819.00 | 819.00 |
Posting OW-5521: the debits come from the coded lines, the credit is the bill.
Step 1: Read the lines
Code line by line from the invoice, not from the total. One bill often belongs in several accounts, and in several departments.
Step 2: Pick the account
Choose the account for what was bought, not for who sold it. The vendor's last bill is a suggestion to start from, not the answer.
Step 3: Apply the policy tests
A service paid for months ahead is a prepaid, and equipment over the threshold is an asset. The prepaid, expense or capitalize lesson works the tests.
Step 4: Add the dimensions
Department, project or location go on the line as dimensions, not into a new account for every team.
Step 5: Attach the source
The invoice itself is the evidence. A bill with no attachment cannot be approved, and an auditor will ask for it.
Approval: who signs, and for how much
An approval says the goods or the work arrived and the price is what was agreed. Most companies write down how much each person can approve: an approval matrix. No rule of law sets the dollar limits. Each company chooses its own and writes them down, and then the matrix has to be followed, because a limit nobody applies is worse than none: it reads as a control that was not operating.
Two rules hold at every rung, whatever the amount. The person who entered the bill never counts toward its approval, and one person fills one role, however many titles they hold. That is segregation of duties at the size of a startup: the person who prepares and the person who approves are different people, so one mistake or one bad actor cannot move money alone.
Step 1: Enter and code
The preparer enters the bill, codes it and attaches the invoice.
Step 2: Match
Purchase order, receipt and bill agree line by line, or the exception is dispositioned. A bill that does not match does not go to the approver as if it did.
Step 3: Route by amount
The amount picks the rung of the matrix, and the form shows who must still sign before the bill is submitted, not after.
Step 4: Approve that version
Approval attaches to a specific version of the bill. If the bill is edited after approval, the approvals are voided and asked for again.
Step 5: Schedule the payment
An approved bill joins the next payment run, on its due date.
One approver
- Good at
- Nothing to configure
- No delay
- Watch for
The founder enters, approves and pays unless someone else releases the run
- Best for
- The first months, when one founder buys everything
A matrix by amount
- Good at
- Small bills do not wait for senior people
- Large ones always get a second look
- Watch for
The matrix has to be kept current as people and budgets change
- Best for
- A team with budget owners
Everyone approves everything
- Good at
Feels safe
- Watch for
Nobody reads the invoice if every bill goes to everyone
- Best for
- No one
Code the lines, route by the amount, and never let the person who entered a bill be the one who approves it.
Finished this lesson?
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- US GAAP
- ASC 330 (opens in a new tab)InventoryFree after registration
- ASC 105-10-05-6 (opens in a new tab)Immaterial items — why a capitalization threshold is allowed at allFree after registration
- SEC
- SEC Release 33-8238 (June 2003) — Sarbanes-Oxley §404 (opens in a new tab)Management's report on internal control over financial reportingFree to read
- Background reading — not an authority
- Wikipedia, “Separation of duties” (opens in a new tab)Separation of dutiesFree to read
The full map is in US GAAP, and where these rules come from.
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- ApprovalFormal authorization of a specific version
- Segregation of dutiesSplitting authorization, recording, custody of assets and reconciliation across different people, so no one person can both commit and conceal an error or fraud — at minimum, preparer ≠ approver
- DimensionA non-account axis: entity, department, projectConvention
- EvidenceDocumentation supporting a recorded amount
- Chart of accountsThe account structureConvention
- Use taxThe buyer-side complement of sales tax, owed at the same rate on taxable goods and services used in a state when the seller did not collect sales tax — self-assessed and remitted by the buyerConvention
- Vendor masterThe record of every approved vendor — legal name, tax classification, TIN, tax form on file, bank details, default terms and who approved the setup. Bank details are versioned, never overwritten
- Capitalization thresholdThe written dollar amount, and minimum useful life, below which an entity expenses a purchase that would otherwise be an asset. GAAP sets no amount — its provisions need not be applied to immaterial items; many US companies align it with the IRS de minimis safe harbor
- Invoice codingAssigning each line of a bill to a GL account and the dimensions — department, project, entity — that say what the cost was for. It decides which statement line the expense lands on, so a wrong code is an error of commissionConvention
- Approval matrixThe written table of who may approve what — by amount, by type of spend and by cost center — and who stands in when they are absent. The system enforces it, and a limit is checked against the whole bill, never the line
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.
See also
- Procure to pay (AP)The payables stack from requisition to reconciliation: requisition → PO → receipt → bill → approval → payment → reconciliation.
- Controls & auditAccounting software is a system of controls, and most of them are enforced in the UI: segregation of duties, approvals bound to a version, an append-only audit trail, and evidence attached wherever an auditor will ask for it.
- Journal entry for accounts payableWhen an approved vendor bill is entered, debit the expense or asset it bought and credit Accounts payable. When it is paid, debit Accounts payable and credit Cash.
- Journal entry for an inventory purchaseWhen inventory is bought on credit under a perpetual system, debit Inventory and credit Accounts payable. If an early-payment discount is taken, debit Accounts payable for the full bill, credit Cash for what is paid and credit Inventory for the discount.
- CapEx vs OpExCapital expenditure buys an asset that will serve for more than a year, so its cost is depreciated over that life. An operating expense is used up in the period and hits the P&L in full right away.
- Accounts payable process for startups: intake to paymentHow a bill moves from inbox to paid: intake, coding, approval, scheduling and recording, plus AP aging and who approves what at a 10-person startup.
- Chart of accounts for startups: a starting templateA starting chart of accounts for a US startup: number ranges, the expense accounts you need, and when to add an account versus a class or tracking tag.
- Accounts payableBills from vendors you've received and approved but haven't paid yet. It's a liability.
- Audit trailA permanent record of every entry: who made it, when, why, and the document behind it.
- BillFormPer-line coding, required evidence, discount ROI surfaced.
- ApprovalChainSegregation of duties enforced. Approvals bind to a version.
- ApprovalInboxMobile-first, document inline.
- ApprovalPolicyEditorSeparate-approver shown as fixed, not a toggle.
- BillDetailSource document inline beside the coding.