Accounts Payable

Accounts payable (AP) is money owed by a business to its suppliers shown as a liability on a company’s balance sheet. It is distinct from notes payable liabilities, which are debts created by formal legal instrument documents. An accounts payable department’s main responsibility is to process and review transactions between the company and its suppliers and to make sure that all outstanding invoices from their suppliers are approved, processed, and paid. Processing an invoice includes recording important data from the invoice and inputting it into the company’s financial, or bookkeeping, system. After this is accomplished, the invoices must go through the company’s respective business process in order to be paid.

Accounts receivable and accounts payable are essentially opposites. Accounts payable is the money a company owes its vendors, while accounts receivable is the money that is owed to the company, typically by customers. When one company transacts with another on credit, one will record an entry to accounts payable on their books while the other records an entry to accounts receivable.

An accounts payable is recorded in the Account Payable sub-ledger at the time an invoice is vouched for payment. Vouchered, or vouched, means that an invoice is approved for payment and has been recorded in the General Ledger or AP subledger as an outstanding, or open, liability because it has not been paid. Payables are often categorized as Trade Payables, payables for the purchase of physical goods that are recorded in Inventory, and Expense Payables, payables for the purchase of goods or services that are expensed. Common examples of Expense Payables are advertising, travel, entertainment, office supplies and utilities. AP is a form of credit that suppliers offer to their customers by allowing them to pay for a product or service after it has already been received. Suppliers offer various payment terms for an invoice. Payment terms may include the offer of a cash discount for paying an invoice within a defined number of days. For example, 2%, Net 30 terms mean that the payer will deduct 2% from the invoice if payment is made within 30 days. If the payment is made on Day 31 then the full amount is paid. This is also referred to as 2/10 Net 30.

The accounts payable departments are responsible for more than just paying incoming bills and invoices. Accounts Payable are usually their own department in larger companies but in smaller businesses accounts payable and receivable tasks are usually combined.

While the size of the business ultimately determines the role accounts payable plays, AP fulfills at least three basic functions in addition to paying bills.

Internal Payments

Accounts Payable is responsible for distributing internal reimbursement payments, controlling and administering petty cash and controlling the distribution of sales tax exemption certificates.

Employees must turn in a manual log report, receipts or both substantiate reimbursement requests. Small expenses such as miscellaneous postage, out-of-pocket office supplies or company meeting lunch are handled as petty cash. AP often handles a supply of sales tax exemption certificates issued to managers to ensure qualifying business purchases don’t include sales tax expense.

Business Travel Expenses

Larger businesses or business that require staff to travel may have their AP department manage their travel expenses. The travel management by the AP department might include making advance airline, car rental and hotel reservations. Depending on the controls of a company, account payable might processes requests and distributes funds to cover travel expenses. After a business travel has occurred, AP would then be responsible for settling funds distributed versus funds actually spent or for processing travel reimbursement requests.

Vendor Payments

Accounts Payable organizes and maintains vendor contact information, payment terms and Internal Revenue Service W-9 information either manually or using a computer database. Depending on the internal controls of a company, an AP department either handle pre-approved purchase orders or accounts payable verifies purchases after a purchase is made. The AP department also handles end-of-month aging analysis reports that lets management how much the business currently owes.

Other Functions

The accounts payable department also work to reduce costs by recognizing details and developing strategies to save a business money. An example is if an invoice gets paid within a discount period that many vendors provide. AP is also a direct line contact between a business and its vendor representatives. Strong business relationships between the two could benefit the company and a vendor might offer relaxed credit terms.

Process involves:

Receiving the bill: If goods were purchased, the bill helps trace the quantity of what was received. The validity of the bill can be known during this time too.

Review bill details: Ensure that the bill includes vendor name, authorization, date and verified and matching requirements to the purchase order.

Updating records once the bill is received: Ledger accounts need to be updated based on the received bills and an expense entry is usually required. Managerial approval might be required at this stage with the approval hierarchy attached to the bill value.

Making timely payment: All payments should be processed before or at their due date on a bill, as agreed upon between a vendor and a purchasing company. Required documents need to be prepared and verified. Details entered on the cheque, vendor bank account details, payment vouchers, the original bill and purchase order need to be scrutinized. A managerial authorization might be required at this point too.