Moderated by Emily, Digital Transformation Consultant at Hyperbots
Emily: Hi, everyone. This is Emily and I’m a digital transformation consultant at hyperbots Inc. Today I’m very happy to have John on the call with me, who is the VP of FP&A, at XR Extreme Reach. So thank you so much, John, for joining us.
John Silverstein: No problem.
Emily: The topic we’d be discussing today is GL codes and debit or credit entries for vendor invoices, and I’d want to kick it off by asking the 1st question, which is John, can you explain what happens in the general ledger when a vendor invoice with multiple items is posted?
John Silverstein: Yeah, when a vendor invoice has multiple items, the GL, looks at those items based on their classification and where they should go from both a tax accounting account basis, department even, and those types of things. So it will go in and classify everything correctly based on the item code. So it’s not by the invoice or customer. That’s 1 thing to note because some people get confused when you look at one account of items, some items on the same invoice might go to tax lines versus office furniture versus computer equipment. So one example is that, like you get a. you have 2 items, office furniture, and computer equipment. One for the office furniture is $10,000. Your computer’s equipment is $5,000. Each of these items would be subject to different tax rates potentially and item, one would have a sales tax rate of 5%. The county tax sales of 2% item, 2 might have 6% and one and a half percent. The total invoice amount before the tax is $15,000. Then you will get office furniture. The item code will go to office furniture and to the account code for office furniture, and if it’s over your limits and everything, then it will capitalize that versus hitting your expense directly. And you’ll have that $10,000 with the $500 of sales, tax, and county tax 200 for a total of 700 hit the tax lines and then your computer equipment of 5,000, and the 6% 375 for 375 of taxes. So that’s it, will Calc directly based on those item codes. So it’s important to get those right.
Emily: Got it understood. So, John, what are the specific debit and credit entries that need to be recorded in order for you to know such, let me just do that again. So, John, what debit and credit entries need to be recorded in the GL for such an invoice?
John Silverstein: Yeah, for such an invoice. You need to debit entries. You’re gonna have furniture and fixtures because you’re creating those assets for $10,000, which would be a numbered code ideally, too, with maybe 1 5 0 0 as the account number and it will record that office furniture as an asset for the computer equipment. It’s over $5,000. So if that’s your threshold and things, too, it will record and purchase the computer and debit the computer equipment as an asset as well. Sales tax payable. We’ll debit $800 and the county sales tax debit 275 as well on the payable side, and then your credit entries would be the accounts payable for 16,075, which includes the full amount, plus the taxes.
Emily: Got it understood. So, John, why are these specific GL codes chosen? And what do they represent in the context of financial reporting?
John Silverstein: Yeah. So these GL codes are chosen based on the nature of the transaction. So because the item is furniture and fixtures, you’re going to hit that GL code 1,500, which represents the capital expenditures for office furniture. So by debiting this account, we can increase the value of our fixed assets on the balance sheet, and you would set up the schedule, too, for amortization as well. That we’ll talk about in another episode, I guess, or in conversation. But computer equipment assets would be 1 5, 1 0 similar to above. This code represents the capital expenditure for computer equipment. It debits and increases that fixed asset as well. So you can start amortizing, appropriately based on what that code amortization is. So if it’s 1 year, 3 years, 5 years, those types of things you can. It will also pick, based on the code that you put State sales, tax payable. These codes represent the liabilities for sales tax owed to the State and county tax authorities respectively. So you’ll debit these accounts temporarily reflecting the recognition of the tax liability until the payment is made and accounts payable. Same sort of thing, a liability account representing the total amount. the choice of these gl codes. It ensures proper classification and accurate financial reporting of these items.
Emily: Understood, understood, and just out of curiosity. How would the entries differ if this invoice was, let’s say, for operational expenses instead of capital items?
John Silverstein: Yeah. The main difference is that it would go directly to your expense. So it is generally a 6,200, 6,300, or whatever your numbering system is for the P. And L. Accounts. So you would hit office supplies and hit the $10,000 as an expense, and then the IT services. Would be $5,000. As well. So you would. It’s 2 different accounts, and your sales tax, though, would remain the same, and you would have to have the office supplies expense and its services, and then the State sales, tax payables, and county sales tax payables.
Emily: Got it. So, John, what challenges do organizations face when posting invoices with multiple items and varying tax rates? And how can they address these challenges?
John Silverstein: Yeah. So to address these challenges and to make sure that when you’re posting the invoices with multiple items of varying tax rates is making sure that you have matching tax rates. So different items may have different tax rates depending on the jurisdiction. It may even be if it’s a resale item, too. You have to. There are other rules in there, too, that you might be exempt from, so it can check those types of things as well. It also, if you’re paying the taxes versus itself tax versus, you’re paying the tax directly to the vendor, those are different coatings as well, so you have to make sure that you get all those correct. So complexity and matching tax rates are critical and it’s complex, particularly in the US. It’s by jurisdiction. Multiple GL codes also complicate the data entry, since it’s not just, that you don’t just purchase one item at a time in one invoice. That’s many items. So those have all different rules depending on it can be services and potentially items that you’re doing. And then they have different tax rates to address these challenges, too. You need to. You can use AI and machine learning to classify these invoice items, apply the correct rates, and make sure that it does capitalize when it’s supposed to be capitalized versus going to the expense rate which would also affect your income tax basis. So integrate with the tax engines for those jurisdictions. You can also have the validation checks. and that will ensure that you have accurate financials.
Emily: I’m doing one last question to summarize everything. John. Now that you mentioned AI and Ml, right, how can technology, particularly AI help in improving the accuracy and efficiency of gl entries for vendor invoices?
John Silverstein: AI can significantly enhance the accuracy of the Geo entries because you can have that data extracted from the invoice and make sure that you’re capturing. It has both items, codes, items, descriptions, all those things that can really check and make sure that you’re actively getting it through the Ocr. You can also use natural language processing techniques to reduce any manual data entry errors. You can also do smart classifications based on the AI models that can classify each item of the invoice to correct gl codes, so you can have it. Go through and look at the historical data plus predefined rules, and you can ensure that those items correctly classify the tax calculations with compliance. AI can automate the application of the correct tax rates and make sure that you’re applying those correctly as well. You also have detection of anomalies, that is, if there are unusual patterns or discrepancies in the invoice, AI can pick those up and alert the finance team for an extra review that can obviously enhance the quality of our financials and make sure that we’re accurately stating everything and get it can also speed up our time.
Emily: got it. Thank you so much. John, for being here with us and talking to us about GL codes and debit or credit entries for vendor invoices. It was really great having you, and the discussion was really insightful. So thank you so much.
John Silverstein: Great great to be here.
