What is Accounts Payable (AP)?

Accounts payable is the money a company owes to its vendors or external vendors. It is the reverse of Accounts receivable.

Accounts payable is a balance sheet account and a current liabilities sub-account.

A current liability is any liability that is short-term in nature. The payments are due in the short term, generally in the same financial year.

The Accounts payable(AP) or finance team manages the accounts payable function.

If you are a small company, your Bookkeeper or someone in your finance team might take care of this function.

Here is a typical workflow for AP:

1. Receive and enter all expenses.
2. Review and approve.
3. Issue payment to the vendors.
4. Provide remittance information to the vendor.

Let’s review that in detail:

Receive And Enter All Expenses

This step includes capturing all the expenses in your accounting system so that you have a single place to review all your expenses.

There are multiple ways a company can spend money with external vendors.

It could be using credit cards, or you have set up terms with different vendors. When you open a line of credit with a vendor, the vendor doesn’t expect an advanced payment for the product or service.

The vendor performs the service or delivers the product, and the invoice is due based on agreed payment terms—for example, 30 days from the invoice date.

With credit cards, the AP team captures the receipts and enters that into the accounting system.

Review And Approve

Once you have all the expenses in one place, the AP team works with stakeholders to get the expenses approved.

Employees generally submit expense reports for credit cards that are reviewed and approved by the managers.

So when the AP team gets the expense reports, they are already approved, and no further review is required.

However, for invoices, the AP team needs stakeholders to review and approve the invoice for payment through accounts payable automation.

The invoice approvals can be done by email or using the accounts payable automation system.

Once the invoices are reviewed and approved through your accounts payable automation system, the next step is to pay the vendor.

Issue Payment To The Vendors

The AP team is responsible for paying the invoices to the vendor.

The AP account is debited or reduced at the time of payment, and the cash account is credited or reduced.

The AP team issues the payments in different ways:

1. You can use a credit card to pay the invoice.

2. You can issue a check to the vendor.
3. You can also issue electronic payments using ACH (Automated Clearing House), and the bank deposits the invoice amount to the vendor’s account.

4. You can manage the payments using your accounting system or third-party payment platforms like Bill.com.

Provide Remittance Information To The Vendor

The last step is to inform the vendor about the payment details. It is called remittance advice.

All it tells the vendor is the amount paid against different invoice numbers.

The vendor then uses this information to update the payment records and mark the invoices as paid.