Accounts payable (AP) is an accounting term used to describe money owed to vendors or suppliers for goods or services purchased on credit. A good accounts payable system also ensures that you don’t have obligations on your books for too long to avoid risking business confidence. Therefore, for a company, managing invoices quickly and accurately is the key to maintaining good relationships with suppliers.
Simply put, accounts payable consists of all your business payables to creditors. Accounts payable are liabilities for the business. This makes it very important to be able to manage effectively and responsibly, as it helps maintain confidence in your ability to pay your debts. Typically, accounts payable refers to short-term debt, that is, things that you plan to pay off within the year. Meanwhile, long-term debt such as mortgages and other loans that take more than twelve months to be repaid are usually itemized as separate liabilities, and are not included in accounts payable.
Accounts payable vs. accounts receivable
For each sale or purchase, your business will issue or receive an invoice. If you have provided goods or services, the finance team will record the amount you expect to be paid in accounts receivable. If you pay an invoice, you will record the amount in accounts payable.
AR is considered an asset because you are relying on receiving the money within a specified time line when the sale begins. The AP is considered a liability because you have to pay the amount within a certain period of time. Accounts payable refers to the processing of payments owed to debtors by your business. Whereas accounts receivable, however, refers to the opposite, money owed to your business by debtors, i.e. people who have not paid for your goods or services.
Manage accounts payable process
In today’s modern era, many people rely on fast and accurate invoice payments to help manage these invoice payments. Before you process a vendor invoice for payment, remember to check the following:
- Does the invoice reflect exactly what the company ordered?
- Does the company actually receive the goods or services billed for?
- Are unit costs and calculations correct?
- Getting these details right will help ensure the accuracy and integrity of your accounts payable process.
Steps or keys in the AP process flow
For most businesses, the accounts payable process boils down to three main steps:
- Completing purchase orders
This involves setting the goods or services to be purchased, as well as the price. The purchase order also lists any terms and conditions for the transaction, and a delivery schedule.
- Processing receiving reports
Here, the supplier records the goods or services provided and lists the payments to be paid to the supplier.
- Receive and process supplier invoices
Once the invoice is received, the business then processes it for payment. As above, this involves checking through every detail to ensure a match with the goods or services actually received.
Another important step in managing the AP process flow
- Using a centralized payment system.
When processing supplier invoices, it is very important to centralize payments. If all of a company’s payments come from a single account, it’s much easier to get a clear picture of the money coming out of a single source.
- Track every payment due clearly
For cash flow, budgeting, and decision-making purposes, it is important to know exactly to whom, and when payments are due. To achieve this, you need to make sure every payment due is clearly tracked in your accounting or expense management software. For many recurring and recurring payments, setting up recurring payments may be more convenient. Recurring payments can take the stress out of managing recurring payments. However, you have to balance this with the need to have visibility across your payments if you don’t want to risk paying for things you no longer need.
- Know exactly who authorized the payment
For each client invoice that comes in, you need to know who is responsible for authorizing the payment. Is it the relevant manager? Is that a CFO? Heck, or is it the CEO? The answer to this question will depend on the structure of the company and the degree of autonomy in managing payments. In the event of spending irregularities, knowing exactly who signed a particular payment is essential to understanding the basics. Not only that, having clear responsibilities also reduces the risk of invoices not being paid.