How to Record Accounts Payable

More often than not, companies will purchase necessities via credit. These purchases usually have set due dates and payment terms that you need to follow.

Aside from finding potential funding sources, you need proper financial management. It keeps you up-to-date on your responsibilities, so you don’t miss any necessary payments.
Recording your accounts payable (AP) is an essential step to maintaining your company’s cash flow.

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What are Accounts Payable?

Accounts payable refers to a business’ short-term financial obligations. The company usually incurs these payables through credit purchases as opposed to debit. What shows up as ‘accounts payable’ on your end would be ‘accounts receivable’ for your vendor.

The term can also refer to the accounts payable section of a company’s general ledger. A business’ accounting team records these obligations to creditors/suppliers.

Accounts payable mostly identifies short-term debts. Thus, the due dates for each item often span one year at the most.

Contrary to popular belief, accounts payable is not an expense account. It is a liability account since the items listed under it are credit purchases. These items would show up in the balance sheet’s current liability section.

Businesses need to settle their accounts payable on or before its due date. If not, they risk defaulting. They might end up shelling out for late payment fees or other penalties.

Some examples might be equipment purchases or replacements, travel expenses, and reimbursements. Records under accounts payable usually do not include inventory liabilities. Accounting usually puts these under trade payables.

Keeping a record of your accounts payable gives you a good view of your financial standing. Your bookkeeping team and CPAs would ideally take charge of this.

For example, buying more goods and services through credit would increase your AP. This increase would be in comparison to your AP during a previous period. If your AP decreases, it signifies that you are paying off your debts faster than you get new ones.

Common Examples of Accounts Payable

Your company’s accounts payable can cover a wide array of liabilities, as it is quite a broad category. It includes the purchase of goods or services through credit from other businesses.

Generally speaking, your AP includes any short-term business obligations. “Short-term” in this case means obligations that the business needs to settle within a year.

These obligations usually come from outstanding invoices issued by other companies. It may include liabilities under long-term contracts, which is considered an account payable as long as the payments need settlement within one year.

However, not all credit purchases go under accounts payable. Businesses usually put expenses necessary for operations under trade payables, including payroll, inventory purchases, or other essential services. Manual tracking might be difficult, so some companies are looking into automation.

Considering these factors, here are some common examples of items under accounts payable.

Vendor and Supplier Payments

The bookkeeping team makes sure to record vendor details and corresponding payables. As soon as the company purchases anything through credit, the transaction needs recording.
Possible items or services under this category could be equipment purchases or repairs. It could also include purchases for company events as well as any necessary services.

Travel Expenses

The pandemic might have put a damper on company trips, but they can be necessary in some cases. The company usually pays for all the required expenses for essential business trips. These expenses could include travel fare, food, accommodations, and event registration fees.

Reimbursements and Petty Cash

Sometimes, employees incur out-of-pocket expenses for the company, and it usually happens when companies only give limited access to the company account. Corporate cards are a popular solution to this.

Otherwise, a company can establish a reimbursement system. For each expense, the employees will present a corresponding receipt. The bookkeeping department will note and record them under accounts payable.

What is the Accounts Payable Process?

Businesses need an established accounts payable process to keep their work consistent. Accounting systems might differ from company to company, depending on their specific needs. Here is a basic workflow that covers the standard bases.

1. Receiving the Invoice

The process begins once the supplier or vendor sends over the invoice. This could be for supplies, equipment, or services the company got through credit.

Once received, the accounting department notes the invoice amount. The accounts payable will cover an accumulated list of invoice balances.

2. Invoice Processing

Once the accounting department gets hold of the invoices, they will undergo processing. This step can differ from company to company. Its most basic form can be just entering the invoice data into the general ledger.

However, this can be a tedious task, especially if there are a lot of invoices to process. Accounting software can help a lot during this step. It minimizes your CPAs’ manual effort to focus more on the other tasks.

3. Verifying Bill Details

Before making payments, relevant individuals need to verify the details on the bill to ensure the accuracy of the vendor, the nature of the order, and the total balance.

The accounts payable team would not do this step all by themselves. People relevant to the transaction will also need to verify the bill or invoice details. Depending on the scope of the transaction, this step could take longer than expected.

Some of the details that need verifying are:

• Name of vendor/supplier
• Company/buyer name
• List of goods or services rendered
• Date of transaction
• Total amount payable

4. Payment

After verifying their bills, the company can send out payments. Depending on the budget or schedule, companies can send these out in bulk or individually.

Payment methods can depend on agreements between the company and its vendors. Some popular methods are sending cheques, electronic fund transfers, wire transfers, or cash.

After sending the payments, the company then waits for confirmation of receipt. This step reaches completion once the vendor confirms that they received the payment.

5. Reconciliation

Once the company completes and confirms its payments, reconciliation is the next step. This involves checking the ledger accounts and financial statements for any inconsistencies.

The payment might be complete, but the accounting team needs to ensure accuracy. They check and cross-check among different accounts in the general ledger.

Reconciliation ensures that the business accounts for every penny. Not only does it minimize errors, but it also catches fraud or unhealthy spending habits. Depending on the size of the business, they can do this daily, monthly, quarterly, or annually.