by ProcureDeskLast Updated : Feb-21-2023
Effective managing Accounts payable can lead to on-time payments, reduced duplicate payments, avoidance of fraud, and efficiency improvement for the AP team.
We’ve created this quick guide to help you understand the basics of Accounts Payable. In this article, we will break down the basics of Accounts Payable, explain how it works, why it’s important, and why managing it effectively can help you skyrocket your business.
Let’s dive in!
Let’s start by understanding what accounts payable is. Accounts payable refers to the financial obligation a company account owes its vendors for the goods and services it receives.
Accounts payable is a liability account or even a record of debts accumulated short-term, which is due within one year. Thus, it’s classified under current liabilities.
Now you’re wondering, how is this debt paid by the company? It’s simple- cash flow.
Companies need to use a robust accounts payable process to manage cash flow and ensure that funds are available to pay their debts on time. Thus, helping the company maintain a good relationship with both its suppliers and even keep a consistently good credit rating.
Accounts payable do not appear on an income statement. Accounts payable is a liability account representing the amount of money a company owes to its suppliers for goods or services that have been received but not yet paid for. As a liability account, it is classified under the current liabilities section of the balance sheet, which is a financial statement that reports the company’s assets, liabilities, and equity at a specific point in time.
The vendors are paid as per agreed payment terms. Most companies use Net 30 as the default payment terms. Companies use electronic payments, wire payments or checks to make clear the outstanding payments for their suppliers.
It is crucial for a company to have an accounts payable team, which is often called as AP for short. The AP team is responsible for managing vital processes within the company.
The main role of the accounts payable team is to process vendor invoices for payment. This can be done manually or using accounting software.
The vendor might send the invoice via email or mail. In that case, the document needs to be scanned before the team can process the invoice.
The accounts payable department then matches the invoice with a relevant document like a purchase order or routes the invoice for further approval. Once the invoice is approved, it is ready for payment.
Once a supplier invoice is approved for payment, the AP department then releases the payment to the vendor. AP team ensures that the different vendor payment dates are met.
The payment process varies from company to company, but most AP teams can pay using checks, ACH, or credit cards.
Once the payment is issued, the AP team sends the payment remittance advice to the vendor. This sometimes includes just the invoice number and the payment made. Some teams also send a copy of the original invoice. This ensures you are proactively presenting the payment status to your vendors.
The AP team provides the required information to generate cash flow statements and accrual data to support the journal entries required per accrual accounting rules. This includes looking at open order reports and report invoice amounts that are not yet entered in the accounting system but the supplier already provides the goods or services. The accounting team uses this information to make the journal entries for accrual.
AP team helps with managing the outgoing cash by managing the timing of the payments to vendors. Payment terms are the obvious way to manage the cash flow, but sometimes AP needs to work with the treasury team to balance Accounts receivable and accounts payable.
The accounts payable team is also responsible for processing employees’ expense reports. That includes expenses using a company credit card or out-of-pocket expenses that must be reimbursed to the employee.
An accounts payable (AP) clerk is a key role within an organization’s accounting department, responsible for processing and managing the company’s accounts payable. The accounts payable department is responsible for recording and processing invoices received from suppliers, reconciling supplier statements, and issuing payments to suppliers.
The AP clerk’s primary responsibilities include verifying and entering invoice data into the accounting system, reconciling invoices with purchase orders, obtaining necessary approvals for payments, and generating payments to suppliers.
In addition to processing payments, AP clerks are responsible for managing relationships with suppliers, ensuring timely and accurate payments, resolving payment discrepancies, and maintaining accurate records of all transactions. They must be detail-oriented and organized and possess strong analytical and problem-solving skills to resolve discrepancies in invoices and payments.
The role of an AP clerk has become increasingly important as organizations rely more on technology and automation to streamline the accounts payable process.
As such, AP clerks may be required to have knowledge of accounting software and automated systems and be proficient in using spreadsheets and other office software.
Here are some of the qualifications for an ideal candidate for an AP clerk position:
Generally speaking, AP clerks play a critical role in ensuring an organization’s financial health and stability by managing its accounts payable and maintaining strong relationships with its suppliers.
The accounts payable cycle, also known as the AP cycle, refers to the process of managing and paying suppliers or vendors for the goods or services provided to a company.
The AP cycle typically involves several steps, which are the following:
The first step in the AP cycle is creating a purchase order by the company, which specifies the details of the goods or services to be purchased, including the quantity, unit price, and total cost.
A purchasing team is responsible for creating and issuing purchase orders to the vendors. Many companies don’t have a purchase order process.
The second step is the company’s receipt of the goods or services. This step involves verifying that the goods or services received match the details specified in the purchase order.
Once the goods or services have been received, a receiving report is created by the company to document the details of the receipt, including the date of receipt, the quantity received, and any discrepancies noted.
The supplier then sends an invoice to the company, which includes the details of the goods or services provided, such as the amount billed, the purchase order number, and the invoice date.
The company’s accounts payable department then processes the invoice, verifying that the invoice details match the purchase order and receiving report.
Once the invoice has been verified, the accounts payable department processes the payment to the supplier. This may involve generating a check or electronic transfer of funds.
The final step in the AP cycle is reconciling payments made to the supplier with the company’s financial records. This helps ensure that all payments have been made accurately and on time.
Here’s a key thing you must always remember: Effective Accounts Payable Management is an important discipline to manage your company’s financial statements effectively. AP teams are responsible for a lot of crucial areas apart from just paying outstanding bills.
The AP team is an integral part of a company’s cash flow management strategy. By managing accounts payable efficiently, negotiating favorable payment terms, and leveraging technology and automation, the AP team can help improve cash flow and ensure the company’s financial stability.
Here are some of the benefits Accounts Payable Management can bring to the table:
The accounts payable (AP) team plays an important role in improving cash flow management for a company.
The team is responsible for processing invoices received from suppliers, verifying invoice data accuracy, and scheduling payments based on agreed-upon terms. By ensuring timely processing and accurate payment scheduling, the AP team helps to manage cash outflows and avoid late payment penalties, thereby improving cash flow.
Many suppliers offer early payment discounts to incentivize customers to pay invoices early. The AP team can help to identify and take advantage of such discounts, which can significantly reduce the cost of goods and services purchased and improve cash flow.
Payable automation software can help improve invoices’ processing time and allow the AP team to capture more supplier discounts.
The AP team manages relationships with suppliers and can negotiate payment terms and conditions favorable to the company’s cash flow needs. For example, the team may negotiate extended payment terms or staggered payments to suppliers, which can help to manage cash outflows.
The AP team can leverage technology and automation to streamline invoice processing and payment schedule, reducing the time and effort required to manage accounts payable. By improving efficiency, the AP team can free up resources to focus on strategic initiatives that improve cash flow.
Upon reading this guide, you already understand that Accounts Payable refer to the amount of money that businesses owe to it’s vendors and is settled using cash flow.
Accounts payable are considered as credit balances. Here are some examples of Accounts Payable:
When setting up a new contract with a supplier, the supplier agrees to specific credit terms.
For example, Net 30 payment terms – mean that the vendor will provide the goods on credit, and once the goods are delivered, the invoice will be raised.
The invoice will list the items that were delivered and the payment terms. In the case of Net 30, it means that the invoice is due within 30 days from the date of the invoice. The same is true for services that are performed in advance. In other words, credit is something that you owe a vendor after the vendor performs the service.
Employee expenses occurs when your employees need to spend money out of their pocket for company expenses. When this happens, employees must be reimbursed.
To do this, the manager and the AP department must review the expense. Afterwhich, payment is then issued to the employee.
Any interest payments on the debts are also considered accounts payable. The AP department processes all payments, whether interest or any other payment, to the vendor. In some companies, this is managed by the treasury team.
Utility bills are very common expenses of any company. This includes electricity bills, rent, or any other recurring payment that needs to be made by the company to the other utility vendors or property landlords.
A 3-way match in accounts payable refers to the process of matching three documents:
A purpose of a 3-way match is to ensure that the amount billed by suppliers is accurate, and that the goods or services received are as expected and have been approved for payment.
In the 3-way match process, the AP clerk compares the purchase order, receipt, and supplier invoice details to ensure they match. If there are discrepancies, the AP clerk will investigate further and resolve any issues before processing the payment.
Once the details are confirmed, the AP clerk will enter the invoice into the accounting system for payment.
Always remember that the 3-way match process is a key control for managing the company’s cash flow and ensuring that payments are made only for valid and approved expenses. By matching the three documents, the company can reduce the risk of overpayment, underpayment, or payment for goods or services that were not received or as expected.
Implementing a 3-way match process in accounts payable can provide several benefits to a company, including:
By matching the purchase order, receiving the report, and supplier invoice, the 3-way match process can help identify errors and discrepancies, reducing the risk of overpayment, underpayment, or payment for goods or services that were not received or were not as expected.
The 3-way match process provides a control mechanism to ensure that payments are made only for valid and approved expenses. This can help reduce the risk of fraud and ensure compliance with company policies and procedures.
The 3-way match process can help improve cash flow by ensuring that payments are made on time and for the correct amount. This can help avoid late payment penalties and maintain good relationships with suppliers.
The 3-way match process can help build stronger relationships with suppliers by paying suppliers accurately and on time. This can lead to better pricing, improved delivery times, and other benefits that can help improve the company’s bottom line.
The 3-way match process can help reduce the time and effort required to process invoices and improve the accounting data’s accuracy. This can help free up staff time for other tasks and reduce the risk of errors or delays.
Accounts receivable and accounts payable are two distinct financial concepts essential to a company’s accounting and financial management system. While both terms refer to amounts that a company owes or owes, they differ in their underlying nature and purpose.
Understanding the difference between these two concepts is essential for effective financial management and for ensuring the health and stability of a company’s financial position.
Keep in mind that a high level of accounts payable may indicate that the company is having trouble managing its cash flow. In contrast, a low level of accounts payable may indicate that the company is taking advantage of early payment discounts offered by its suppliers.
A non-PO (purchase order) invoice is an invoice that does not have a corresponding purchase order. It is often used for one-time or infrequent purchases or services where a purchase order is not required.
If a company is not utilizing a purchase order process, then all invoices will be processed as non-PO invoices. The non-PO invoices could range from office supplies to suppliers providing services on credit.
In accounts payable, non-PO invoices are processed separately from PO invoices and may require additional approvals and documentation to ensure they are valid and accurate before being paid.
An increase in accounts payable during a period means that a company has received goods or services from suppliers for which it has not yet paid.
This increase in accounts payable is a liability for the company, as it owes money to its suppliers. The result of this increase is also an increase in the company’s current liabilities on its balance sheet and a corresponding decrease in its cash or other assets (if it hasn’t paid for the goods or services yet).
From a cash flow perspective, an increase in accounts payable may temporarily improve a company’s cash position, as it has not yet paid for the goods or services received. Still, it will eventually need to pay those amounts in the future.
Accounts payable automation and software solutions are increasingly becoming popular among businesses in today’s time.
As a business owner, automating your accounts payable will not only streamline your processes but also keep your financial operations efficient. Let’s briefly get to know more about Accounts Payable Automation and Accounts Payable Software.
Accounts payable automation is the process of automating the accounts payable process. This involves using software to streamline and automate the entire process from invoice entry to payment. Automation can help reduce costs, improve accuracy, and increase efficiency in accounts payable departments.
The automation process begins with invoice entry, the first step in processing an invoice for payment. Accounts payable software helps with AP automation.
Accounts payable software is a type of software that is designed to streamline and automate the accounts payable process for businesses. It typically includes features such as invoice processing, vendor management, payment processing, and reporting.
Accounts payable software can help businesses improve the efficiency and accuracy of their accounts payable process by automating tasks such as data entry, invoice matching, and payment processing. This can reduce the time and resources required to manage accounts payable and help businesses avoid payment errors or delays.
Common features of accounts payable software may include:
Overall, accounts payable softwares can help businesses improve their accounts payable processes, reduce costs, and better manage their cash flow. Many different accounts payable software solutions are available, ranging from basic tools to enterprise-grade systems. Businesses should evaluate their needs to choose the best option for their organization.
The most difficult part of accounts payable can vary depending on the company, its processes, and its challenges.
However, some common difficulties that account payable professionals often face include the following:
Accounts payable departments may receive a large volume of invoices to process, which can be time-consuming and require a lot of attention to detail.
Accurately recording and processing invoices, purchase orders, and receipts can be challenging, especially when there are discrepancies or errors in the documentation.
Accounts payable departments ensure that payments are made on time to avoid late fees or other penalties. This can be challenging when there are delays or issues with processing invoices.
Accounts payable departments must follow all relevant laws, regulations, and company policies when processing invoices and making payments.
As technology advances, accounts payable departments need to keep up with new software and tools to remain efficient and effective.
Overall, the most difficult part of accounts payable can vary depending on the specific challenges that a company and its accounts payable team face. However, by implementing effective processes, controls, and technology, companies can overcome these difficulties and improve their accounts payable operations.
In conclusion, Accounts Payable is a critical financial metric that you must look out for in your business. Effective management of your accounts payable is vital for you to maintain a healthy cash flow successfully and streamline your financial operations.
This can increase efficiency, improve accuracy, solid security, and even better savings!
Are you currently looking for a company to support you with your Accounts Payable Automation? Look no further, here at ProcureDesk, we’re here to help you! Start your demo today and begin your journey to a smooth and hassle free financial operations.
What you should do now
Whenever you’re ready… here are 4 ways we can help you scale your purchasing and Accounts payable process.