Procurement, Procedure for Procurement of Materials and Documentation involved in Materials Accounting

Procurement refers to the process of acquiring goods, services, or raw materials from external sources to support an organization’s operations. It involves identifying needs, selecting suppliers, negotiating contracts, and ensuring timely delivery while maintaining quality and cost efficiency. Procurement plays a crucial role in supply chain management, ensuring that businesses obtain the necessary resources at optimal prices. It can be classified into direct procurement (for production materials) and indirect procurement (for operational needs like office supplies). Effective procurement strategies focus on cost reduction, supplier relationships, risk management, and sustainability to enhance efficiency and profitability in an organization.

Procedure for Procurement of Materials and Documentation involved in Materials Accounting

• Identifying Material Requirements

The first step involves determining the quantity and type of materials required based on production schedules, inventory levels, and demand forecasts. The Bill of Materials (BOM) and requisition forms help identify the exact needs.

• Preparing Purchase Requisition

The concerned department submits a Purchase Requisition (PR) to the purchasing department. This document contains details like material specifications, quantity, required date, and supplier preferences. It is approved by authorized personnel before proceeding.

• Supplier Selection and Purchase Order Issuance

Potential suppliers are evaluated based on quality, cost, delivery time, and reliability. A Request for Quotation (RFQ) is sent, and upon comparison, the best supplier is chosen. A Purchase Order (PO) is then issued, specifying price, quantity, terms, and delivery schedule.

• Receipt and Inspection of Materials

When materials arrive, the Goods Receipt Note (GRN) is prepared after verifying quality, quantity, and specifications against the purchase order. Any discrepancies or damages are reported using a Rejection Report for corrective action.

• Invoice Verification and Payment

The supplier submits an invoice, which is matched with the Purchase Order and GRN before payment approval. A Payment Voucher is prepared, and payments are made as per agreed terms.

• Recording in Material Accounting

The materials are recorded in the Stock Ledger and Inventory Control System. Any material issued for production is documented through Material Issue Slips to ensure proper tracking and cost allocation.

Documentation Involved in Materials Accounting:

• Purchase Requisition

Purchase Requisition (PR) is an internal document generated by departments to request procurement of materials. It includes item description, quantity, and urgency. Sent to the purchase department, it initiates the purchasing process. This document ensures that only authorized materials are procured and avoids duplication. It plays a crucial role in inventory control and budgeting.

• Purchase Order (PO)

Purchase Order is a formal contract issued to a supplier, confirming the purchase of specific goods at agreed terms (price, quantity, delivery date). It acts as a legal commitment to buy and helps track incoming inventory. It’s essential for audit trails, payment processing, and supplier performance evaluation.

• Goods Received Note (GRN)

Goods Received Note is prepared by the storekeeper when materials are received. It records the date, quantity, condition, and any discrepancies in delivery. The GRN is matched with the PO and invoice for three-way matching in accounts payable. It confirms physical receipt and supports inventory updates and payment authorization.

• Material Requisition Note (MRN)

MRN is raised by production or user departments to request materials from the store. It records details like item code, quantity, and purpose. This ensures accountability and traceability of internal inventory movement. It also helps in tracking material consumption and controlling wastage.

• Material Return Note

Material Return Note is used when issued materials are not consumed and returned to the store. It records the reason for return, item details, and condition. This helps in inventory reconciliation and ensures that unused stock is accurately recorded, reducing material losses.

• Issue Voucher (or Stores Issue Note)

This document records materials issued from stores to various departments. It includes item details, quantity, and receiving department. It supports cost allocation, helps track consumption by cost centers, and ensures proper authorization of material usage. It forms the basis for inventory valuation and cost control.

• Inspection Report

Inspection Report is prepared by the quality control team after examining the received materials. It specifies whether the materials meet required specifications. Accepted goods are entered into stock, while rejected ones are returned or replaced. This ensures quality assurance and minimizes defects in production.

• Invoice

Invoice is issued by the supplier and includes the price, quantity, and tax applicable on materials supplied. It is used for matching with the PO and GRN before making payments. It is a critical document for accounting entries, GST filings, and maintaining vendor records.

• Stock Ledger

Stock Ledger maintains a detailed record of all material movements — receipts, issues, and balances. It provides a real-time view of inventory and aids in valuation (FIFO/LIFO/Weighted Average). It is crucial for monthly closing, auditing, and detecting discrepancies in physical vs. book stock.