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Ultimate Guide to Coding Invoices: Process and Solutions


Automate supplier invoice coding to reduce invoice processing costs and errors.

Coding invoices in accounts payable has traditionally been a manual process that requires too much time to complete, is subject to human error, and increases invoice processing costs. 

In contrast, modern AP automation provides efficient, AI-powered automatic invoice coding and processing to replace manual coding and other manual accounts payable processes with a system that digitizes invoices. 

This article defines invoice coding for accounts payable (AP) and accounts receivable (AR) and explains how to code invoices for accounts payable. To solve problems inherent in manual invoice processing, we recommend integrating AP automation software with your current ERP or accounting system. 

What is Invoice Coding?

Invoice coding is a process for recording invoice line items using the general ledger chart of accounts. GL accounts identify revenue or expenditure categories, departments, and locations to compare with budgets and track revenue or business spending. Invoice coding for accounts receivable and accounts payable may include other identifying information, such as lot tracking. 

Coding Invoices in Accounts Payable

Accounts payable coding for supplier invoices requires using the company’s general ledger chart of accounts. 

Explaining the General Ledger Chart of Accounts 

In practice, a widely accepted GL chart of accounts numbering sequence for coding is:

  • 1000 – 1900 Assets
  • 2000 – 2900 Liabilities
  • 3000 – 3900 Equity
  • 4000 – 4900 Revenue
  • 5000 – 9000 Expenses

In the general ledger set-up of your accounting software or ERP system, your business assigns account numbers and sub-account numbers for its chart of accounts. The chart of accounts has a numbering scheme that includes a top-level asset or expense category that flows to the balance sheet or income statement in financial reporting. The general ledger is set up to total its underlying sub-accounts and roll them up into the primary account. 

Expense sub-accounts include identifiers for location, department, cost center, and detailed expense category. Sub-accounts for general & administrative (G&A) expenses include facility rental costs by location, office supplies, insurance expense by type, utilities, wages and benefits, and other expense categories. 

Asset, liability (and revenue) sub-accounts are also detailed. For example, cash sub-accounts are used for each bank account. 

Accounts Payable Codes for Supplier Invoices

Project codes can be included in more complex account coding. For multi-entity companies, each entity and the corporate-level organization may be another dimension for account coding. 

Accounts payable is a liability account with a credit balance when recorded. Using double-entry bookkeeping that requires each accounting transaction to balance, the accounts payable team (or AP automation software) initially codes the expenditures as debits to asset accounts for inventory and fixed asset purchases (for equipment) or as debits to expense accounts. As part of coding invoices for accounts payable, tax account coding is also required. 

When paying invoices for accounts payable purchases on invoices with credit terms, debit the accounts payable account for amounts that were originally recorded for the invoices being paid. Credit the cash sub-account (for a specific bank account) for the amount paid and code any early payment discounts earned as a credit to the discounts account. 

How to Write an Invoice Code

Accounts payable invoice codes usually consist of sub-account numbers with hyphens (similar to dashes) between the account number and other identifying dimensions like cost center. The larger the entity, the more complex its chart of accounts to capture and track all required dimensions. 

Some accounting software, like Sage Intacct, incorporates multiple dimensions to simplify the general ledger chart of accounts and the process of drilling down to different levels of data or selecting different groupings for viewing visibility. 

Supplier or vendor Invoice coding for accounts payable, in its fullest meaning, goes beyond general ledger account coding with dimensions. 

Invoice coding needs to capture the important information related to incoming invoices from suppliers in the accounting and payments system financial records as invoice field data. 

Essential invoice code information includes general ledger sub-accounts from the chart of accounts with identifying information, supplier name and ID, invoice number, related PO number, invoice date, due date, line item amounts, taxes, and credit terms like early payment discount.

Coding Purchase Order vs. Non-PO Invoices

Accounts payable supplier invoice coding differs slightly for purchase order vs. non-PO invoices. When inventory items and other types of large purchases are ordered, POs will apply. For the PO-related invoice matching process to work, code (or capture) invoices for goods or services ordered in connection with a purchase order to include the related PO number. 

Part of the accounts payable invoice processing workload is matching invoice data with related purchase orders and, if applicable, receiving reports (for 2-way or 3-way matching). Three-way matching verifies that goods were ordered in the same quantities at the prices billed by line item on new invoices and that the company is only paying for goods after received. 

Your automated invoice processing system should include automatic matching and access to these electronic invoices and other documents for automated verification with payment rules for error detection, invoice approval, and payment processing. 

This digital automation and visibility will increase the efficiency of your accounting and AP team compared to manual invoice matching and approvals with paper POs and receiving reports.

Is your company wasting time manually coding supplier invoices?

AP automation software uses AI technology to code invoices automatically, reducing invoice processing costs, improving accuracy, and reducing hiring needs.


The Challenges of Manual GL Coding

Manual general ledger (GL) account coding in accounts payable is challenging in numerous ways. 

Manual GL coding challenges include:

  • Additional staff hiring is required for increased volumes of invoice coding and processing.
  • Familiarity with GL account codes has a learning curve, reducing the efficiency of new hires. 
  • Bottlenecks arise in the coding process, delaying recording, approvals, and invoice payments to suppliers and reducing the company’s ability to take early payment discounts on time, or being charged late fees. 
  • Human errors occur in account coding, causing spending and budgets to misalign. 
  • Invoice processing costs increase. 
  • Accounts payable are not recorded in real-time, giving an incomplete picture of liabilities and cash requirements to pay invoices, causing unfavorable surprises. 

These challenges of time-consuming manual data entry for general ledger account coding necessitate a new AI-driven AP automation solution with machine learning for automatic invoice account coding and completion of other end-to-end accounts payable processes.

What is Automated Invoice Processing?

Automated invoice processing is the application of AI and other technologies to streamline workflows and eliminate paper-based systems and manual data processing. It substitutes digitalization in invoice-to-pay, from supplier invoice receipt to invoice coding, routing approval processes, making electronic global payments, and preparing real-time batch payment reconciliation to the general ledger. 

Automated invoice processing uses technologies such as artificial intelligence/machine learning, OCR invoice processing (optical character recognition), and RPA (robotic process automation) to complete routine tasks. 

Automated invoice processing from Tipalti includes:

  • Guided self-service supplier onboarding, including W-9 or W-8 forms collection, and supplier validation to reduce fraud risk
  • Invoice receipt with OCR/AI-powered digital data capture by line items and headings
  • Error flagging and duplicate invoice detection
  • 3-way or 2-way matching to the purchase order and receiving report 
  • Automatic GL account coding 
  • Global regulatory compliance 
  • Supplier payment tracking and automated tax compliance preparation reports or optional eFiling
  • Approval workflow routing for global payments with a choice of payment methods in 196 countries and 120 currencies
  • Real-time payment batch reconciliation 

Coding Invoices: Streamline the Process with Automation 

AP automation software has seamless integration with your ERP or accounting software. Your business will automatically sync data including GL coding to subsidiary journals and the general ledger for preparing financial reports like the Accounts Payable Aging with open invoices not yet paid and the financial statements. 

Your business will streamline the invoice coding process and achieve scalability when volume increases with business growth, lessening the need to hire accounts payable staff. It will also replace human error-prone manual coding for supplier invoices with coding automation that reduces invoice processing costs while improving financial statement accuracy and budgetary control over spending. 

Tipalti finance automation software uses artificial intelligence, including ChatGPT, for automatic general ledger account coding and OCR/machine learning for invoice and expense receipt data capture. It helps you save time and money, complete invoice processing in time to take lucrative early payment discounts, and understand the cash flow amount and timing needed to pay supplier invoices. Learn more about using Tipalti AP automation for completing end-to-end payables processes, including invoice coding. 

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