Key Takeaways

• Timely Recording Prevents Month-End Chaos. Each P2P stage (goods receipt, invoice matching, payment) requires specific journal entries to maintain accurate books and avoid last-minute corrections.

• GR/IR Accounts Bridge Timing Gaps. Goods Receipt/Invoice Receipt clearing accounts temporarily hold liabilities for received-but-unbilled items, ensuring obligations are tracked before invoices arrive.

• Tax Compliance Demands Separate Tracking. GST, TDS, and other tax components must be recorded distinctly during invoice posting and payment to support accurate filings and audits.

• Month-End Accruals Capture Hidden Liabilities. Uninvoiced receipts require accrual entries to reflect true financial position, with reversals in the following period when actual invoices arrive.

• Automation Reduces Matching Errors. Integrated P2P systems automatically sync purchase orders, goods receipts, and invoices, eliminating manual reconciliation delays and payment discrepancies.

Introduction

Chasing invoices, fixing mismatches, and waiting on approvals often leaves your books behind. If your procure-to-pay (P2P) cycle feels like a mess of emails and spreadsheets, it's because manual processes slow everything down. They lead to unclear records, delayed journal entries, and last-minute cleanups at close.

Processing a single invoice still costs about ₹800. That’s time and money better spent elsewhere.

P2P journal entries help you stay in control. You track every financial action—raising purchase requests, placing orders, receiving goods, processing invoices, and making payments. Each stage updates your general ledger, so nothing gets lost or delayed.

This guide shows you exactly which entries to make, and when, so you can stop cleaning up and start closing faster.

What Is Procure-to-Pay (P2P) Accounting?

P2P accounting tracks how your procurement activity shows up in your books. From requesting goods to making the final payment, each step creates a financial impact that needs to be recorded, whether you're adding inventory, booking an expense, or recording a vendor liability.

By posting the right journal entries at the right time, finance teams stay in control of spending, avoid last-minute adjustments, and keep the month-end close smooth.

P2P Journal Entries: A Step-by-Step Accounting Guide

The P2P process connects operational actions, such as raising a purchase request, receiving goods, and paying vendors, with the journal entries that keep your books accurate and audit-ready.

Here’s how each stage in the P2P flow maps to journal entries and what finance teams should track along the way.

1. Purchase Requisition Creation

No journal entry.

Creating a Purchase Requisition starts the procurement process by signalling a need for goods or services. Though it doesn’t generate P2P journal entries, it initiates internal approvals before issuing a Purchase Order.

2. Purchase Order (PO) Issuance

No journal entry.

The PO is a legally binding document that confirms intent to purchase. It lists item quantities, prices, delivery terms, and payment conditions.

3. Goods Receipt (GR) Recognition

First point where a journal entry is posted.

When goods or services are delivered, the organisation gains value and must record it, even before the invoice arrives. This reflects the economic benefit received and establishes a temporary liability.

Journal Entry Example:

• Debit Inventory (for stock) or Expense (for services)

• Credit GR/IR Clearing Account

The GR/IR Clearing Account holds the value of received items until the invoice arrives. This helps finance track obligations that are incurred but not yet billed.

4. Invoice Receipt (IR)

The vendor invoice confirms the amount owed. The finance team compares it with both the purchase order and the goods receipt. This step is crucial for verifying accuracy and ensuring compliance with contract terms.

Journal Entry Example:

• Debit GR/IR Clearing Account

• Credit Accounts Payable

This clears the interim accrual created during the goods receipt and formally recognises the liability to the vendor. It also ensures that any discrepancies between ordered, received, and billed quantities are identified and resolved.

5. Classifying as Expense or Inventory

What is being purchased determines how it is recorded.

Goods that are held for use or resale are posted to Inventory and recorded as an asset.

Services, subscriptions, or one-time-use materials are posted directly to Expense.

Correct classification at the goods receipt stage affects financial reporting, compliance, and how entries appear in cost analysis. Misclassification can lead to misstated financials or tax errors.

6. Accounts Payable Recognition

If the GR/IR account is not used, the liability is recorded directly when the invoice is received.

Journal Entry Example:

• Debit Inventory or Expense

• Credit Accounts Payable

This entry reflects the vendor's obligation and updates the balance sheet. It also prepares the record for payment processing while keeping outstanding liabilities accurate.

7. Vendor Payment

Once the invoice is approved, payment is initiated. The finance team clears the vendor’s payable from the books and records the cash outflow.

Journal Entry Example:

• Debit Accounts Payable

• Credit Bank or Cash

This final entry completes the procurement transaction and ensures that cash flow reports, vendor balances, and reconciliations remain up to date.

8. Handling Purchase Returns and Credit Notes

When goods are returned or vendors issue credits, the original entries must be adjusted.

Journal Entry Example:

• Debit GR/IR or Accounts Payable

• Credit Inventory or Expense

These entries reverse the earlier transactions and update your accounts to reflect the actual value received. If credit notes apply after payment, they may also reduce future vendor payables or appear as separate receivables.

Also Read: Understanding Procurement: Key Processes, Benefits

Tax and Compliance Entries in P2P

Tax entries in P2P go beyond simple invoice and payment processes. You must accurately record input taxes, accrue uncharged use tax, and reconcile these against payables and cash flows. Companies across tax regimes protect themselves from non-compliance, penalties, and overpayments through careful tax accounting.

• Record GST at Invoice Receipt: When booking a vendor invoice, separate the base amount and input GST. This allows your business to claim GST credit later and keeps tax reporting accurate.

• Apply TDS on Eligible Payments: For services and other applicable transactions, deduct tax at source. Record the net amount payable to the vendor and the TDS amount as a liability to be paid to the government.

• Book GST on Advances to Unregistered Vendors: If you pay an advance to a vendor not registered under GST, self-assess GST at the time of payment. This ensures compliance with reverse charge rules.

• Reverse Input GST on Delayed Payments: If vendor payment is delayed beyond 180 days, reverse the input GST already claimed. Reclaim the credit only after the payment is made, as per GST rules.

• Settle Vendor Liability at the Time of Payment: When paying the vendor, record the net amount transferred. The TDS deducted remains a separate liability until it is remitted to the authorities.

• Remit GST and TDS to the Government: When tax dues are paid, clear the respective GST or TDS payable accounts. This step is essential to close the tax loop and file returns properly.

• Maintain Clear Audit Trails for All Tax Entries: Ensure all tax-related transactions (GST, TDS, reversals, and remittances) are linked to vendor invoices and payment records. This supports accurate filings (like GSTR-2 and TDS returns) and smooth audits.

By mapping these entries and compliance actions, finance teams can accurately record procurement costs, manage statutory obligations, and support returns and audit trails.

Also Read: 15 Key Benefits of Procurement Software

Month-End Accruals and Reconciliations

At month-end, finance teams need to account for received items not yet invoiced and clean up open P2P balances. This ensures accurate books and smooth closing.

• Accrue Uninvoiced Receipts: Record expenses or inventory received but not yet invoiced.

  • Dr Expense/Inventory

  • Cr GR/IR or Expense A/P Accrual

• Reverse Accruals Next Period: In the following month, reverse prior accruals to adjust balances:

  • Dr GR/IR or Accrual

  • Cr Expense/Inventory

• Reconcile GR/IR Balances (GRNI): Match goods receipts to vendor invoices. A growing GR/IR balance may indicate missed invoices or duplicate entries.

• Close with Final Adjustments: Before finalising books:

  • Confirm that the accruals are posted

  • Reconcile GR/IR and AP

  • Review and resolve mismatches

  • Ensure all reversals ran correctly

Consistent P2P accruals and reconciliations reduce errors, keep liabilities accurate, and support faster, audit-ready closes.

What are the Challenges of the P2P Cycle in Businesses?

Many businesses face hurdles during P2P processing that slow operations, increase errors, and complicate accounting. These issues range from manual workflows and system fragmentation to compliance risks and limited visibility.

1. Manual Processes and Paper-Based Tasks

Teams still rely heavily on paper invoices and spreadsheets. This manual approach introduces frequent errors, delays approvals, and forces rework during audits.

2. System Silos and Poor Integration

Disparate procurement, invoicing, and payment systems cause data mismatches, slow reconciliations, and obscure the matching of GR, PO, and invoices.

3. Limited Spend Visibility

Teams can’t track open obligations, delivered goods, or spending patterns when systems remain disconnected. Finance teams struggle to budget, forecast cash flow, and detect fraud.

4. Invoice Matching Delays and Errors

Mismatches between PO, GR, and invoices force manual reviews. Late detection of discrepancies can delay payments and damage supplier trust.

5. Approval Bottlenecks and Lack of Accountability

Unclear ownership over P2P slows approvals. Stuck invoices delay cash flow, waste time, and result in missed early payment discounts.

6. Supplier Management Challenges

Relying on manual vendor onboarding and unclear policies undermines supplier relationships. This risks delivery delays, compliance issues, and negotiation failures.

7. Compliance and Audit Risk

Insufficient documentation, missing approvals, or incorrect tax entries invite audit failures. Manual processes seldom maintain robust audit trails.

8. Scaling Limitations

Growing transaction volumes overwhelm manual teams. Businesses struggle to scale P2P operations without adding staff or increasing cycle time.

Businesses correct these gaps through automation, integrated workflows, and clear roles. Doing so drives the following changes:

• Streamline Three-Way Matching: Tools automatically match PO, GR, and invoice data without needing spreadsheets or manual checks. This speeds up validation, reduces payment delays, and minimises errors.

• Real-Time Visibility into Liabilities: You can track received-but-not-invoiced goods (GR/IR), pending payments, and open POs, all in one place. This helps finance teams close books faster and plan working capital more accurately.

• Stronger Controls and Compliance: Built-in approval flows, audit logs, and tax validations ensure every entry is supported and compliant. This reduces the risk of failed audits or incorrect filings.

• Scalable, Audit-Ready Processes: As your transaction volume grows, automation keeps your P2P entries consistent and timely, without the need to grow your team linearly.

Let’s look at how Kodo help you do exactly that.

How Can Kodo Streamline the P2P Cycle for Your Business?

If your procure-to-pay process is clogged with scattered emails, missing approvals, or late P2P journal entries, Kodo brings order to the chaos. 

• Purchase Requests: Create and track purchase requests using custom digital forms. No more chasing teams for approvals or wondering where requests are stuck.

• Purchase Order: Set up multi-level approval flows based on amount, department, or vendor category. This cuts delays and gives you tighter control over commitments.

• Vendor Payments: Kodo enables scheduled or one-time payouts with maker-checker controls, audit trails, and real-time payment status tracking.

• Invoice Management: Automate 2-way and 3-way matching to reconcile POs, receipts, and invoices. You avoid mismatches, overpayments, and rushed corrections at month-end.

• Cross-Platform Integration: Connect Kodo to ERP systems like Tally, Zoho, SAP, and Oracle, accounting tools, and payment platforms. Data flows both ways, so every entry gets recorded without manual rework.

You get a single system to handle everything, from purchase requests to invoice matching, so your team spends less time fixing errors and more time moving work forward. 

Conclusion

Missing or delaying journal entries throws your books off track. To stay in control, you need to match every step in the procure-to-pay cycle with the right accounting entry. That includes everything from purchase requests to vendor payments. Record commitments early, track liabilities on time, and close your books without last-minute cleanups.

You don’t need more tools. You need clear steps and timely execution. 

Track what you buy. Record when you owe. Mark when you pay.

Kodo makes this simple.

It automates every part of the P2P process, including approvals, invoice matching, vendor payments, and journal entries. You can set workflows based on department, category, or transaction value. Real-time syncing with your ERP keeps records accurate and eliminates duplicate work.

More than 2,000 businesses use Kodo to reduce overhead, improve accuracy, and close books faster.

Book a demo and take control of your spend.

FAQs

1. What journal entries are triggered during a goods receipt but before the invoice arrives?
   At the time of goods receipt, companies often record a Goods Received Not Invoiced (GRNI) entry:

• Dr Inventory (or Expense Account)

• Cr GRNI Clearing Account
  This bridges the timing gap between receiving goods and receiving the invoice.

2. How are purchase returns handled in journal entries within the P2P cycle?
   When goods are returned, entries reverse the original receipt:

• Dr GRNI or Accounts Payable

• Cr Inventory or Expense Account

3. What happens if there’s a price variance between PO, GRN, and invoice?
   Price variances are logged as separate journal entries:

• Dr/Credit Price Variance Account (based on underpayment or overpayment)
  This helps track budget deviations and vendor negotiation issues.

4. How is a prepaid purchase recorded in the P2P cycle?
   When advance payments are made:

• Dr Advance to Vendor (Asset)

• Cr Bank/Cash
  Once the invoice is matched, the advance is adjusted:

• Dr Expense or Inventory

• Cr Advance to Vendor

5. Are tax components booked separately during invoice posting?
   Yes. For compliance, tax components like GST, VAT, or TDS are recorded distinctly:

• Dr Input Tax Account

• Dr Expense/Inventory

• Cr Accounts Payable (Net of Tax)