What Are Accounts Payable?
Accounts payable represent an account within the general ledger that refers to a company’s commitment to pay off current liabilities to its vendor. In other words, accounts payable are unsettled amounts owed to suppliers for services or goods they have provided. The total of all due amounts owed to the suppliers is demonstrated as accounts payable on the balance sheet. The increase or decrease in total AP reflects in the cash flow statement. AP ensures timely payment of bills and invoices that improves a company’s overall credit rating and long-lasting relationships with suppliers and vendors. Clearing invoices on time make sure the smooth flow of supplies and services leads to the uninterrupted flow of business operations. Making payments on time keeps your business away from penalties and fines. It helps to avoid vendor fraud and theft. C.
- Accounts payable are debts that must be settled within the given timeline to avoid default.
- Account payables are basically short-term IOUs (I owe you) from one entity to another. The other entity would show the transactions as a surge in its accounts receivable in the same amount.
- If AP is increasing over a certain period, it indicates that the company is purchasing goods and services on credit.
- Decreasing AP means the company is paying previous outstanding amounts quicker than buying goods and services on credit.
Having a great AP process ensures efficiency
Even though accounts payable falls under the category of a back-office function, it is a crucial business process. An accounts payable process can be broken into four stages, however, complications in each stage may differ according to the nature and size of the company. These stages are-
- Receiving the invoice
- Reviewing the invoice
- Approving the invoice
- Paying suppliers/parties
Once an invoice has been approved for payment processing, early payment may result in a discount. Someone from the accounts staff will issue the final payment for an invoice using cash from the company, a cheque, a credit card, a bank transfer, or another form of digital payment.
The success of an AP process is dependent on how well employees can manage the procure-to-pay cycle punctually. A great yet successful AP process ensures:
- Healthy associations with suppliers and third parties, which is beneficial for the company from a broader perspective.
- An uninterrupted supply of goods and services to keep the business running without hassles.
- There will be no late payments, which may result in no fines or interest having to be paid.
- Minimal missing or duplicate payments. If all invoices and payments are tracked in a systematic manner fraud risk is also reduced.
- Better control of the company’s cash flow.
Like a classic timepiece, the accounting process relies on a multitude of gears to run smoothly and effectively. Any minor error may lead to spoiled relationships, payment delay, and stalling of business processes. For this reason, and to ensure efficiency, many enterprises and small company owners are turning to AP automation.
What are the elements of a great AR process?
The objective of the AP procedure is to verify the validity and correctness of each payment made by the company. It is a segment of the P2P (procure-to-pay) process, which encompasses all actions ranging from procurement through to invoice processing and vendor payments. Most firms have a distinct AP department that handles incoming bills/invoices as well as vendor payments. The department’s tasks may differ based on the size of the organisation. Here is what it takes to make a great AR process.
Creating a system that tracks invoices to be paid
An automated system that can keep track of what has to be paid and when depending on the size of your business and the number of invoices received, is critical for cash flow management while avoiding late payment, which can harm supplier relationships. When determining priorities, it is obvious that bills should be paid in the order in which they were received, before the due date, and according to the payment terms.
It might be difficult to assure timely and accurate payments if you have hundreds or even thousands of invoices arriving weekly, or if you run a seasonal firm with high invoice volumes during a particular season. Account personnel are also required to reconcile the invoice with the purchase order and the receipt of products (if applicable). You don’t want to send an invoice for payment until you’ve confirmed that the goods have been received and match the description.
Many suppliers offer discounts on early payments and you should identify those opportunities. If there is no discount, clear the invoice on the due date not before the timeline, to maintain a smooth cash flow.
Creating a rigorous process to follow up with the vendor
For a great AP process, you must create a centralised system where you can remain connected with all vendors and suppliers from a single location. A two-way communication platform with your vendor that is clear and open goes a long way towards minimising misunderstandings and fostering trust. Collaboration with the vendor provides the potential for innovation and value development. You can send them reminders and follow-ups for timely invoice generation to make sure your payment cycle matches the due dates of invoice clearance. Moreover, vendors can raise their issues and problems on this platform to get them resolved quickly.
Creating a strong petty cash process
A strong petty cash process ensures the efficiency of an AP process. When cash is deposited to a petty cash fund, the primary idea is to replace the amount of money that was previously dispensed from the fund. This requires totalling all disbursements and issuing paybacks to the fund in that amount. The accounts payable department writes a cheque to the cashier for the amount required to be replenished in the petty cash. The cheque is deposited and the funds are converted into cash by the cashier. The petty cash reconciliation form is forwarded to the general ledger accountant by the accounts payable department.
Creating a great filing system for vendor invoices
Filing receipts and invoices correctly is one of the most essential things a business can do for its financial health. One of the significant benefits of a filing system is that it keeps all your pending invoices in order and ensures you don’t lose track of payments you have to make. When a vendor invoice is paid, it should be filed in cheque number sequence or by date. This approach will save time in preparing file folders, categorising paid invoices, and filing those bills. Other benefits include not needing as many supplies or taking up as much storage space. The most typical hurdle to the AP procedure is the constant requirement of having to refer back to the original invoice. But it happens in certain scenarios, such as construction work costs, which may need a review of previous bids.
Accounts Payable vs Accounts Receivable
Non-accounting people might get confused while dealing with accounts payable or accounts receivable. These two aspects of your accounting are maintained in very similar ways, but it is vital to distinguish between accounts payable and accounts receivable since one is an asset account and the other is a liability account. When you mix the two, you risk losing balance in your accounting equation, which will show up in your basic financial statements.
They write a check to the cashier for the amount required to be replenished as petty cash.