Acquisition and Payment of Goods and Services Foreword · 2014-07-21 · payer initiates the payment process in the AP module of the MSA system. The packing slip and original invoice

Administrative Simplification University of Ottawa - December 1996

Acquisition of Goods and Services and Payment of Invoices Reference Manual: THEORY

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Acquisition and Payment of Goods and Services

Foreword

This manual describes the redesigned process for the acquisition and payment of goods and services.The process was reengineered in the context of the Administrative Simplification project that wasundertaken at the University in 1996. The manual presents the theoretical (i.e. business) aspects ofthe process; a second manual entitled Accounts Payable User’s Guide / PAYMENT OFINVOICES was written to complement this one and describes how a person should use thecomputerized MSA Accounts Payable system for this process. The manual was written as a teameffort by Luc Gratton, France Malette, France Renaud, and Jean-Marc Dubé.

Introduction

At the University of Ottawa, whenever a purchasing process is to be initiated, two questions shouldbe asked:

- does the value of the purchase exceed $5,000?- are the goods or services considered “restricted?

In either case, one of the two following processes will apply:

1) local payment with no purchase order2) central payment with a purchase order

APPENDIX 1 shows a decision chart of the different purchasing scenarios that may arise andthe corresponding payment processes that should apply.



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Definitions

Payment Request: the action of requesting that a cheque be produced to pay for thepurchase of goods or services, the reimbursement of travel expenses,the external transfer of University funds, the payment to anindividual, or the replenishment of petty cash.

Financial Code: the three way combination of MSA codes for fund, general ledgeraccount, and cost centre (i.e. 2-51011120-2530999)

Order Number: the unique 10 character number that is assigned to each purchasingtransaction (i.e.1501160237 or 5901FM0001); this numbercorresponds to the currently used purchase order number (alsoreferred to as “PO REFERENCE” in the MSA system); the first fourcharacters indicate the buying entity, the next two characters usuallyidentify the operator or the sector, and the last four consist of a fourdigit number that makes the entire field unique.

Control Number: the number that is automatically assigned by the MSA system to abatch of invoices entered in the AP (Accounts Payable) application.

Restricted Goods/Services: a good or service for which a purchase order must be produced andapproved by Materials Management regardless of the monetary valuefor the order (e.g. an order for office furniture). For a more thoroughexplanation of this topic, please refer to the MMS DecentralizedPurchasing Reference Manual.

Log Book: the register that will be used to control order numbers; it will containthe order number and any other information useful for managementpurposes: date of purchase, requestor, supplier, description of goodsor services ordered, amount, date of reception, date of payment, etc.



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Basic Principles

C Two distinct, responsible individuals must participate in every financial transaction.

C Only original invoices must be used to initiate a payment; account statements must never beused as reference for a payment. Rather, they should be forwarded to Financial Services forfollow up.

C Invoices must be entered in the system as promptly as possible in order to benefit from anyapplicable discounts and to post the expense to the AFF (Available Funds File) and thegeneral ledger.

C In the future, only two paying entities will be used for paying invoices: ENG1 for paymentsmade in Canadian funds and ENG2 for payments made in US dollars. Therefore, the fourthcharacter of the corresponding Buying Entity and the fourth character of an order number willbe a “1" or a “2" (e.g. 1501 1501082345 or 2502 2502DR1234).

C In the text that follows, three character, upper case, and underlined acronyms that areembedded in parentheses, e.g. (CDE), refer to online screens in the MSA Accounts Payablesystem.

Functions and Controls

In the newly simplified process, it will now be possible for local administrators in faculties andservices to pay invoices for goods and services not exceeding $5,000 which are not “restricted” ina decentralized manner. In other cases, a formal purchase order and a central payment will apply.This will be done directly and online in the Accounts Payable module of the MSA system. The liststhat follow show the current system features which will continue to apply as well as a number ofcontrols that will be introduced to ensure that the new process meets functions properly.

Current Features

C Automatic distribution of taxes, freight charges, and discounts allocated to each financialcode based on a prorata of amounts.

C Automatic processing of the refundable portion of the GST.C Centralized intervention required for completion of two types of exceptions: required funds



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not available and financial codes not on the AFF.C Automatic assignment of payment dates to allow for maximum benefits from allowable

discounts and optimized cash flow.C Inquiry screens available for all required functions. Controls

C Access limited to authorized financial codes within invoice entry process.C Validation of financial codes online as invoices are entered.C Verification of available funds online as invoices are entered.C Two local electronic interventions required for each transaction.C Possibility of assigning different levels of approval based on amounts.

Role Players

C Managers (Deans, directors, researchers, or their delegates)C Buyers/ Requesters (Faculties and Services)C Supply Officer (buyer) (Materials Management)C Payers (Faculties and Services, Finance)C Approvers (Faculties and Services, Finance)C Financial ServicesC Materials Management ServiceC Suppliers

Note: Even though it is possible for a single person to assume more than one of these roles, it is notpossible for one person to be both payer and approver for the same particular transaction; twodistinct and responsible individuals must intervene in every single financial transaction.

The two process descriptions which follow should be read in conjunction with the flow diagrams thatappear in APPENDIX 2. The same numbering scheme is used in the descriptions and in thediagrams.



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1) Process - Local Payment with No Purchase Order

1.1 Planning for a purchase

Once a need has been identified, the buyer plans the acquisition of goods or services incompliance with regulations and methods of the University and/or granting agencies. He or she mustmake full inquiries in order to obtain the best combination of product, supplier, price, warranty,payment terms, and delivery options.

The manager accountable for the cost centre’s budget must approve the purchase of thegoods or services either in writing or verbally. He or she must verify that the required funds areavailable and that any University and/or granting agency rules that should apply in the purchasingprocess are in fact respected.

1.2 Placing the order

The buyer records the order number and all other pertinent information in the unit’s logbook. He or she conveys the order to the supplier by telephone, fax, letter, or e-mail, indicating theorder number, article, quantity, price, delivery and payment terms, delivery address, invoicingaddress, ...

1.3 Receiving the goods and approving the (paper) invoice1.4

The buyer or the manager examines the delivered goods, initials the invoice or packing slip,(to indicate that the goods received correspond to the invoice/packing slip) and sends it along to thepayer thereby indicating that the paying process should be initiated.

1.5 Entering the transaction in the AP system

Upon receiving the initialized original invoice or the invoice and initialized packing slip, thepayer initiates the payment process in the AP module of the MSA system. The packing slip andoriginal invoice documents must be matched if they have been sent as separate documents. C He or she opens a new batch of invoices (CDE) and enters the appropriate paying entity -

ENG1 or ENG2 - depending on whether Canadian or US funds should be payed.



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C He or she goes on to enter the details of the transaction (IWS) indicating the invoice number,invoice date, supplier number, order number, financial codes, amount due, and the handlingcode if it is required (see below).

C He or she balances the batch (CES) periodically. It is essential that this step be done on aregular basis: we suggest that it be completed at least daily (or whenever approximately 50transactions have been entered, whichever comes sooner). Reconciling the total for allamounts entered with the amount indicated in the header record will be simpler if thisguideline is respected. As well, potentially serious system problems will be avoided.

C As soon as the data entry process for a single invoice is completed, the corresponding AFFrecords are adjusted. At the same time, the invoice is redirected to the designatedapprover(s) automatically. If an error is detected during the data entry phase (e.g. invalidfinancial code) the system displays an appropriate error message and the payer must makethe required corrections.

Notes:

Creation of new vendor (supplier) records in the computerized system:

The responsibility for this task rests in Financial Services; whenever it is appropriate,Materials Management will complete the process by entering into a formal agreement withthe vendor. Since only paying entities ENG1 and ENG2 will be used for all paymentrequests, vendor records will only be created in these entities. In order to keep this processsound and accurate, and to avoid the creation of duplicate entries for a single supplier, astrict procedure will be established - this will include the faxing of a copy of an invoice toFinancial Services when such a request is made.

Handling code

Normally, all invoices (from all across campus) issued for a supplier will be groupedtogether to produce a single cheque - specific details will be shown on the cheque stub.In certain, exceptional circumstances, payers may require that a single cheque be issuedfor a specific invoice. The handling code is the field which will allow this process tooccur.



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Documents without an invoice number

For documents that do not bear an invoice number (e.g. Bell Canada invoices), the payershould create such a number adding to the “client number” (phone number in the caseof Bell Canada) a suffix representing the year and the month in order to make the numberunique - a unique number is required in the system. For example this will yield a numbersuch as 2222199609.

If no “client number” applies, then the order number should be repeated in the invoicenumber field - e.g. 1501160237.

C If one of the two following conditions is met:C insufficient funds in the AFFC valid financial code that is not in the AFF

then the payer is allowed the option of ignoring the warning message displayed by thesystem and may “force” the transaction through; the invoice will however be held in anoffline holding file and the AFF will not be updated. In order to activate these transactions,Financial Services must invoke a special releasing function (BCQ); it is the payer’sresponsibility to advise the approver that this situation has occurred; he or she, in turn, mustcommunicate with Finance to determine an appropriate course of action leading to the releaseof the transaction or its deletion.

If it is agreed that the transaction may be released, then the transaction should be approvedby the approver - this should not be done before the transaction has been released from theBCQ. In these cases, the AFF is not updated until the next update run for the General Ledger(normally run three times a week, on Friday, Tuesday, and Thursday nights). It should benoted that no cheque will be issued for invoices that are not yet approved; as well, invoicesretained in the holding file will not affect the generation of other cheques.

In cases where Financial Services refuse to release a held transaction, the payer will berequired to amend the invoice or request that it be deleted (by Financial Services).

1.6 Forwarding the source documents to the approver

C The payer forwards to the approver the (physical) invoices thereby indicating that they areready to be approved in the AP system.



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1.7 Electronically approving the payment

C Upon receiving the paper invoice, the designated approver retrieves it in the (DAR) screenof the AP system where all transactions ready for his or her approval are displayed.

C The approver verifies the pertinence of the payment requests and approves each individuallyafter having compared it to the physical documents in hand. In cases where the approverrefuses to approve a transaction, the payer must then modify it, or delete it and restart theprocess. In either case, the transaction will be subjected to approval again.

In all cases where the payment request has not been routed to the holding file for exceptions(BCQ) - this will occur in the vast majority of cases - the AFF balances will have beenadjusted appropriately and then the GL will be updated shortly after. This is true whetheror not the transaction has been approved. It is therefore extremely important that the processbe dealt with in a timely manner, either by approving the invoice which will cause thegeneration of the cheque or by having the invoice cancelled. Otherwise, transactions whichhave been recorded in the general ledger (and AFF) will be held in a suspended queue andno payment will be generated because the approver has not completed his part of theprocess. In the case where an approver refuses to approve a payment request and asks thepayer to have the transaction withdrawn subsequent to a GL update, both the originaltransactions and the reversing entries will show up in the GL.

Designated Approvers

When the security profile of a payer is initially established in the system, the systemsecurity administrator specifies the appropriate approver codes (a maximum of 5) to beassociated with the individual. The physical documents, after having been entered by thepayer, must therefore be forwarded to one of these five designated approvers as deemedappropriate within each unit locally.

FINAL APPROVAL

THE APPROVAL PROCESS ENGAGED UPON BY THE APPROVER IS THE LASTSTEP TAKEN BEFORE FINALIZING THE REQUEST FOR PAYMENT; NO OTHERVERIFICATION OR CONTROL WILL BE DONE BY CENTRAL SERVICES BEFORE



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THE CHEQUE IS ACTUALLY PRODUCED.

THE PRINCIPLE OF TWO SIGNATURES FOR EACH FINANCIAL TRANSACTIONSHOULD BE RESPECTED AT ALL TIMES. UNDER NO CIRCUMSTANCESSHOULD SOMEONE DIVULGE THEIR OPERATOR ID AND PASSWORD TOSOMEONE ELSE. THE USE OF AN UNAUTHORIZED OPERATOR ACCOUNT ISA REPREHENSIBLE ACT OF FRAUD AND SUBJECT TO DISCIPLINARY ACTION.

1.8 Producing, verifying and mailing cheques

C Once a week (normally on Thursday morning), Financial Services receive the printed butunsigned cheques. After summary verification, they are signed and posted to the suppliersor the faculties/services depending on the handling code specified by the payers.

C It will still be possible to have cheques produced on an “urgent” basis. In these cases, themanager will be required to convey this requirement to Financial Services where the“exceptional case” will be processed using the appropriate MSA function.

Note:

The system accumulates all payment requests for a particular vendor producing one singlecheque for that supplier. The use of the handling code allows users to circumvent thisprocess by producing a cheque for a specific invoice - in these cases, the cheque will bereturned directly to the faculty or service rather than being mailed to the supplier.Because of the inherent inefficiency of this approach and the ensuing extra processingcosts for the University, the handling code option should be used with extreme discretion.



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2) Process - Central Payment With a Purchase Order

2.1 Planning for a purchase

Once a need has been identified, a buyer plans the acquisition of goods or services incompliance with regulations and methods of the University and/or granting agencies. Incollaboration with Materials Management Services, he or she must make full inquiries in order toobtain the best combination of product, supplier, price, warranty, payment terms, and deliveryoptions.

The manager accountable for the cost centre’s budget must approve the purchase of thegoods or services either in writing or verbally. He or she must verify that the required funds areavailable and that any University and/or granting agency rules that should apply in the purchasingprocess are in fact respected.

2.2 Preparing and approving a purchase requisition2.3

a) with an encumbrance and a printed purchase order

C The requestor prepares an electronic requisition in the PS module of the MSA system,taking care to designate “MMS” (Materials Management Services) as the designated buyer.The requestor also ensures that the order number and other pertinent information arerecorded in the log book.

C The designated local approver proceeds to approve the requisition electronically in the PSsystem.

b) with an encumbrance only

C The requestor prepares an electronic requisition in the PS module of the MSA system,taking care to designate “FIN” (Financial Services) as the designated buyer. The requestoralso ensures that the order number and other pertinent information are recorded in the logbook.

C The designated local approver proceeds to approve the requisition electronically in the PSsystem.



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2.4 Verifying and transforming the requisition


C The supply officer verifies the details of the requisition and makes appropriate adjustmentsas required. The requisition is then converted to a purchase order transaction.


C Financial Services transform the requisition to a purchase order transaction therebygenerating the required GL encumbrance transaction. It should be noted that in these casesthe purchase order is not printed and no document is sent to the supplier.

The requisition has been transformed into a purchase order by Financial Services simply toencumber funds in the MSA system.

2.5 Placing the order


C The buyer sends the purchase order to the supplier specifying the order number, item(s),quantity, price, delivery and payment terms, delivery address, invoicing address, ...


C The local buyer conveys the order to the supplier by telephone, fax, letter, or e-mail,indicating the order number, article, quantity, price, delivery and payment terms, deliveryaddress, invoicing address, ...

2.6 Receiving the goods and approving the (paper) invoice2.7

C The buyer or the manager examines the delivered goods, initials the invoice or packing slip,(to indicate that the goods received correspond to the invoice/packing slip) before forwardingit to Financial Services, thereby indicating that the paying process should be initiated.



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2.8 Forwarding the invoices to Financial Services and entering the transactions in AP2.9 C Upon reception of the original invoice, duly approved, Financial Services initiate the

payment process by entering the transaction in the AP module of the MSA system.

C After verifying the invoice, the financial officer completes the payment process by matchingthe invoice to the original order in the system.

2.10 Forwarding the Invoices

C The invoices are sorted and sent along to the designated approver in Financial Services.

2.11 Approval

C The payment requests are then approved electronically by Financial Services in order togenerate the payment.

2.12 Producing, verifying and mailing cheques

C Once a week (normally on Thursday morning), Financial Services receive the printed butunsigned cheques. After summary verification, they are signed and posted to the suppliersor the faculties/services depending on the handling code specified by the payers.

C It will still be possible to have cheques produced on an “urgent” basis. In these cases, themanager will be required to convey this requirement to Financial Services where the“exceptional case” will be processed using the appropriate MSA function.

Notes:

The system accumulates all payment requests for a particular vendor producing one singlecheque for that supplier. The use of the handling code allows users to circumvent thisprocess by producing a cheque for a specific invoice - in these cases, the cheque will bereturned directly to the faculty or service rather than being mailed to the supplier.Because of the inherent inefficiency of this approach and the ensuing extra processingcosts for the University, the handling code option should be used with extreme discretion.

Original invoices, paid by Financial services or supported by a purchase order, will be



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filed in Financial Services.

SUBTLETIES IN PROCESSING

1) Provincial Sales taxes (PST)

C One should always question whether goods that are being purchased will be used solely forresearch. If this is the case, the buyer should verify whether they are PST exempt, inaccordance with article #7(1)-18 of the retail sales tax act. This article allows for PSTexemptions for goods that are designed and used exclusively for research; it stipulates asfollows:

“ In the instance of a university’s management exclusive use of manufactured goods forresearch and study purposes, including spare parts for these goods; the said exemption doesnot apply to the goods, spare parts, or installation costs and labor if the goods are intendedfor teaching purposes....”

Goods that are designed and used exclusively (100%) for research include the followingtypes of items when they are purchased for use in laboratories or for scientific activities:tools and instruments, accessories and auxiliary goods, and computers (including diskettesand serial programs).

In the case of goods that are not meant to be used exclusively (100%) for research, provincialsales taxes must be paid.

C Provincial sales taxes should never be paid to provinces other than Ontario. If goods orservices that would normally be taxable in Ontario are purchased outside of Ontario, thentaxes must be self assessed and remitted to the province: the payer must compute the amountof sales tax that is applicable and pay it to the province of Ontario. In these cases, the dataentry procedure in the (IWS) screen of the AP system is slightly different: a debit entrycorresponding to the taxable amount should be posted against the cost centre of the facultyor service while a credit entry should be made against the provincial sales tax account for thesame amount.

2) GST

C The AP system automatically debits one third of the amount of applicable GST against thecost centre for the faculty or service, and the other two thirds to a central receivable account



1 see definition in Materials Management manual for decentralized buyers.

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for GST.

C In the case of travel expense reimbursements, the applicable GST must be calculatedmanually, and the payment request is processed in a different manner:

The amount that should be posted against the faculty or service cost centre corresponds to33% of 6/106 of the total amount spent. The remaining 67% of 6/106 should be postedagainst the central receivable account: 1-10204300-122980199.

These details are included on the preprinted travel expense form. People who use thecomputerized spreadsheet format will find that these calculations are done automatically;however, they will be required to enter the data in the AP system in the same manner asthose who use the paper form.

C When a payment request is made for replenishing petty cash, the GST should be distributedas described on the preprinted forms designed specifically for this purpose.

C When purchasing “printed books, audio recordings of printed books, or printed versions ofreligious writings1”, the revised excise tax law in effect since October 24, 1996, allows forthe total refund of paid GST. The total amount of invoiced GST must be posted to thecentral receivable account for GST: 1-10204600-122980199.

A detailed explanation of how these particular transactions should be processed appears in theaccompanying manual, Accounts Payable Users’ Guide / Payment of Invoices.

3) Lost Invoices

C Since all invoices will now be sent directly to faculties and services, should you ever find aninvoice that does not belong to your unit, it should be forwarded immediately to FinancialServices.Finance will make inquiries to identify the manager to whom the invoice should have beenposted, and ensure that it be delivered as promptly as possible.



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