Understanding Procure to Pay (P2P) Process

What is a Procure to Pay (P2P) Process?

The Procure to Pay (P2P) process is a series of steps that a company follows to acquire goods or services from external suppliers. It involves everything from identifying a need, selecting a supplier, purchasing, receiving goods, invoices and making payments. It is essentially the entire lifecycle from requisition till payment.

Let’s understand this with an example of company ABC, where ‘X’ Department needs office supplies so they request its purchase department, the purchase department obtain quotes from various vendors later issues an order to a vendor against which goods are received and invoiced, finally the vendor is settled with payment.

Detailed breakdown of the P2P Process

Purchase Requisition (PR)

A Purchase Requisition is a formal request made within an organization to acquire goods or services. It serves as the initial step in the P2P process, indicating a need for specific items or services.

• Purchase requisitions are typically generated by employees or departments that require certain goods or services to carry out their tasks. Purchase requisitions go through an approval workflow, where they are reviewed and approved by supervisors or managers to ensure they align with the company's budget and procurement policies.

No Accounting Impact

Request for Quotation (RFQ) and Quotation

A Request for Quotation is a document issued by a company to request price quotes from potential suppliers for the provision of goods or services.

• It is typically used during the P2P process to gather information on pricing, terms, and other relevant details from multiple suppliers before making a purchasing decision.

• Suppliers review the RFQ and prepare and submit their quotations in response. The company evaluates the received quotations based on factors such as price, quality, delivery time, and supplier reliability.

• After evaluating the quotations and any negotiations, the company selects the supplier that offers the most favorable terms and meets the required criteria.

No Accounting Impact 

Purchase Order (PO)

A Purchase Order is a formal document issued by a buyer to a supplier, indicating the specific goods or services that the buyer intends to buy.

• It serves as a contractual agreement between the buyer and the supplier, outlining the terms and conditions of the transaction. The PO includes the agreed-upon price terms, Delivery Terms, return policies, etc.

No Accounting Impact

Goods Receipt (GR)

The Goods Receipt step in the P2P process involves the acknowledgment of the receipt of goods or services ordered through a Purchase Order. In this step, the receiving department confirms that the goods or services have been delivered as per the terms specified in PO.

• The receiving department generates a Goods Receipt document, either manually or through an automated system, to record the receipt of goods or services. This document includes details such as the PO number, received quantities, condition of goods, any discrepancies, and the signature or acknowledgment of the receiving party.

• Accounting entry made when goods are received is: the value of the inventory increases, hence the inventory account is debited and the GR/IR account is credited. This account is a temporary holding account used to track the value of goods received but not yet invoiced. Inventory A/c Dr.

GR/IR clearing A/c Cr.

Invoice Receipt (IR)

Invoice receipt in the Procure to Pay (P2P) process is a critical step where the buyer formally acknowledges the receipt of an invoice from the supplier for goods received. It represents the point at which the supplier sends an invoice to the buyer for payment, typically after the goods have been delivered.

• The accounts payable department verifies the invoice with the corresponding purchase order and goods receipt.

• Accounting entry made when an Invoice is received: the GR/IR clearing account is debited, represent reduction in balance that was initially recorded and the Supplier account is credited, represent reduction of liability owed to the supplier for Goods received.

GR/IR Clearing A/c Dr.

Vendor A/c Cr.

Vendor Payment

After receiving and verifying an invoice, vendor payment involves processing funds to the supplier for goods or services provided. This includes steps like invoice approval, selecting payment methods, executing payments, recording the transaction.

• Upon receipt of the invoice from the supplier, the accounts payable department verifies the accuracy of the invoice by comparing it with the purchase order and goods receipt, it goes through an approval process within the organization and the invoice is scheduled for payment according to the agreed-upon payment terms. Later the organization notifies the vendors of the payment made, providing them with remittance advice or payment confirmations as proof of payment.

• Accounting entry made when Vendor Payment is made: the Vendor account is debited, represent reduction in the liability owed to the vendor and the Bank account is credited, represent reduction of Bank balance for payment made to supplier against Invoice.

Vendor A/c Dr.

Bank A/c Cr.

Thank you for taking the time to read my blog. I appreciate your support and hope you found this content valuable. Stay tuned for our next blog post, where we will dive deeper into the FI-MM Integration of P2P Process in SAP S/4 HANA. We'll also explore the essential configurations required from the MM Module side to master the P2P Process in SAP FICO.

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