What are Accounts Payable?

The Importance of Accounts Payables

Every business needs a team to keep an eye on its finances. That is how you keep your business financially stable and afloat. Aside from that, there are a few other reasons.

The accounts payable department pays attention to how much you owe and when you should pay it. Keeping up with your debts is critical. It ensures financial stability and maintains your business’ good reputation.

Buying things on credit usually means having to pay at a specific time. Making timely payments should be the norm. Failing to meet these deadlines would usually force you to pay late fees or penalties. These typically grow through time. The longer you put off paying them, the more you’ll have to pay in the end. You would end up losing more money than what you originally spent.

Another effect of irresponsible accounts payable management is reputation damage. Constantly missing due dates would not be a good look for your business. Vendors and suppliers would not be too keen on doing business with someone who does not pay on time.

For these reasons, every business needs an accounts payable team and an efficient one at that. They ensure to account for each of your debts. They are integral for good financial relationships with your suppliers and clients.

However, manual tracking of each payable can be a difficult task. Accounting is already tedious, and even more so with a growing number of transactions.

It’s good that accounting automation is an option for businesses, big or small. Accounting software removes the burden of manually entering figures on a spreadsheet. Your accounts payable team can focus more on analysis and problem-solving with AP automation.

Accounts Payable Examples

Accounts payable covers quite a lot of categories. It includes the company’s short-term debts and financial obligations, except payroll, which is a different category altogether.

Here are a few basic category examples:

Travel Expenses

Sometimes, businesses need to travel for official or business purposes. Ideally, the company will cover any necessary expenses, including airfare or fuel, food and accommodation.

Reimbursement And Petty Cash

Employees most likely rely on reimbursements if a company doesn’t use corporate cards. It’s important to keep track of internal cash flow. Regular updating of accounts payable takes care of this.

Vendor/Supplier Payments

The accounts payable department makes sure to track vendor details and corresponding debts. Any credit purchase done by a company immediately goes under accounts payable. These purchases can include essential materials and supplies. When the items are for inventory, these will go under trade payables.

Recording Accounts Payable

Recording accounts payable is a relatively simple process. What complicates the process is the sheer volume of transactions and its numerous approvals and dependencies across different teams.

Most businesses adhere to the double accounting process for their general ledgers. By doing so, every transaction needs to have an offsetting debit and credit. These two values will balance each other out.

For example, if a business makes a $100 purchase on credit, a $100 debit needs to be to the expense account. Buying a computer monitor on credit for $300 would show up as a $300 purchase on account for credit. It would also show up as a $300 debit for computer accessory expenses.

In simpler terms, our asset account for computer accessories increases by $300. The same thing happens for our liability account, which is also the accounts payable. We have balanced our debit and credit records.

It is best to record transactions under accounts payable as soon as the invoice or voucher arrives. This way, your ledger ends up with prompt updates that you can easily track. The practice also helps the department keep up with any relevant deadlines.

The accounts payable tracks the cash flow until the company pays the debt. Once they do this, the team will then update the general ledger accordingly.

Accounts Payable Process

Handling transactions under accounts payable needs a proper system. This way, the team can monitor the process and troubleshoot effectively. Having an established workflow also ensures a consistent quality of work in the team.

A well-implemented accounts payable process also ensures security on both ends. Each step requires careful review. These internal controls ensure minimal errors and streamline the AP process.

Accuracy is critical when dealing with payments. It’s best to be careful, as some transactions involve significant amounts of money. Proper use of accounting software can help ease the process.

Below you can find a basic accounts payable workflow. Of course, this isn’t set in stone. Each team can modify the workflow depending on their company’s needs.

Receiving The Invoice

The vendor or supplier usually issues an invoice immediately upon making a purchase. They can send the invoice electronically (via email) or through a physical copy. The accounts payable department receives the vendor invoice and notes it for review.

Invoice Processing And Review

Before immediately making a payment, the accounts payable team needs to review it. Doing so ensures that the invoicing source is a legitimate vendor and that all details are correct.

Some data that they need to review and confirm are:
the vendor name

• company name
• list of goods/services rendered
• the total amount payable
• date of transaction and payment

Besides the accounts payable team, relevant departments also need to review the invoice. This process can take from a few hours to several days, depending on the extent of the invoice. It depends on the number of people or departments relevant to the transaction.

Authorizing Payment

Once the relevant departments have reviewed the invoice, the team will arrange payment. It is usually the chief financial officer (CFO) that handles this.

In this step, they set aside the amount they need and the intended date for the payment.

Making The Payment

Payment methods can depend on a company’s preference. They typically accept checks, but electronic payments are becoming more popular nowadays.

The accounts payable team needs to make sure that they take processing time into account. Sure, you can file for payment today, but it might take a few days to go through, depending on the bank.

To be safe, a company can begin processing the payment at least a few days before the due date. This way, you do not risk any penalties or other consequences for late payment.

Accounts Payable vs Trade Payables

Accounts payable and trade payables are often used interchangeably. They do have some similarities. Both accounts payable and trade payables are under a company’s current liabilities. However, there is still a subtle difference.

‘Trade payables’ is a term specific to goods necessary for inventory. Accounts payable is commonly known as short-term debts and obligations.

For example, a restaurant would list meat supply expenses under trade payables. But, if their computer breaks down and they have to get a new one under credit, it would be under accounts payable.

The accounting team sometimes lists trade payables separately from accounts payable because the company anticipates the expenses for trade payables.

Accounts Payable vs Accounts Receivable

In simple terms, accounts receivable is the opposite of accounts payable. Whenever a company issues an invoice, the amount stipulated goes under accounts receivable.

Accounts payable is what the company owes to its vendors and suppliers. Accounts receivable is the money owed to the company, mostly by its clients and customers.

For example, let’s say a company buys $100 worth of office supplies through credit. This amount goes under the company’s accounts payable. But at the same time, the office supply store lists the same $200 under accounts receivable.

The same goes for transactions between a store and its customers. For example, a customer buys a couch on credit for $200. This amount immediately goes under the store’s accounts receivable.