WHAT IS ACCOUNT PAYABLE?

WHAT IS ACCOUNT PAYABLE?

Accounts payable is the money owed by a business to its vendors and suppliers for goods and services received. The amount to pay within the due date is known as Accounts Payable (AP). The business’s cash flow statement shows the increase or decrease in total AP.

AP Department is responsible for dealing with payments between the company and suppliers. There should be an efficient system to manage payment process to work productively. Different payment management software are working for this purpose. It will help you check payable due dates on a regular basis to avoid late payments.

This article covers :

What is the Role of Accounts Payable?

The Accounts Payable Department is responsible for payments, and they maintain the balance of expenses by receiving payments, processing, and verifying invoices. Their primary role is to provide financial, administrative, and clerical support to the company.

Some companies have their separate department of ‘accounts payable, but in small businesses, they usually have combined departments for both payable and receivable amounts.

Three basic functions of Accounts Payable:

Accounts Payable serves three basic functions besides just paying bills. These are:

  1. Travel expenses of a business
  2. Internal payments
  3. Supplier payments

Travel expenses of a business:

There are larger businesses that involve a lot of traveling of their staff to different sites. Expenses of traveling are under the control of the AP Department. It processes and distributes funds for traveling expenses.

It manages:

  • Airline expenses
  • Car rental
  • Hotel reservations

AP would then be responsible for settling funds that spend on traveling.

Internal Payments:

Accounts Payable Department is also responsible for managing internal office supplies and payments. It also controls the distribution of sales tax exemption certificates.

All the minor expenses, including:

  • Office supplies
  • Miscellaneous postage
  • Company meeting lunch

are handled by the Accounts Payable Department of a company.

Supplier Payments:

Accounts Payable regulates the supplier contact information, payment term, and internal Revenue Service manually or using a database.

It can either manage purchase orders before they are approved or verifies purchases after making a purchase. 

It also manages aging analysis reports to estimate how much a business currently owes by the end of the month.

Other Functions:

Accounts Payable Department not only deals with payments, but it also helps to save money by minimizing the costs of a business. If a company pays an invoice within the discount period, it may get maximum discounts to save money.

It helps establish fair terms between a company and a supplier by keeping direct contact between the two.

What is the Accounts Payable Process?

Accounts Payable Department follows a complete process before making a supplier payment.

All the steps are essential to follow:

Receiving an invoice:

Invoice helps to track the billing if any product or service is purchased. It also helps to keep evidence and to ensure the validity of a billing document.

Reviewing invoice details:

An invoice must have the contact information of a supplier.

Including:

  • Name of a supplier
  • Authorization of  a company
  • Dates of an issue and due dates
  • Verified officially
  • Other requirements for the purchase

Updating records :

On receiving a new billing document, record-keeping is essential. Approval from the manager requires at this stage. It helps to keep the record of new purchases and expenses of a company (financial statements).

Issuing Payment:

The final step is of paying bills on time, deciding between a company and a supplier. A company can also avail discounts on paying amounts within the due date.

All the required documents must be prepared and verified at the time of payment.

Including:

  • Detailed cheque
  • Bank account details of a supplier
  • Original bill/invoice
  • Purchase order

These documents require official approval from the manager.

How to get Invoices Paid

What to prevent in the accounts payable process:

For the safety of the company’s assets, the accounts payable process must prevent:

  • Paying a fraudulent invoice
  • Paying an inaccurate invoice
  • Paying an invalid invoice
  • Paying a supplier invoice twice

What to include in Accounts Payable?

Accounts Payable refers to the current liability of a company on its balance sheet.

The Accounts Payable Department is responsible for payments, and they maintain the balance of expenses by receiving payments, processing, and verifying invoices. 

It also collects short-term credits on services and goods from its suppliers and creditors. Businesses must use accrual accounting to match the revenue with expenses, regardless of cash flows timing.

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