What are Accounts Payable?
Accounts Payable and its management are crucial for any business. It refers to the amount owed by an entity to its suppliers or vendors for the goods or services availed. Once goods are ordered by an entity and delivered, a record of liability is registered in the book of accounts based on the invoice amount before making the final payment.
The short-term liability to the vendors, suppliers, and others in the business is referred to as accounts payable. Once the payment is made for the purchases, the amount is subtracted from the accounts payable balance.
Every business entity will have an accounts payable department. Its structure is dependent on the size of the business. The accounts payable section is set up based on the probable number of service providers or vendors, the volume of payments processed over a period of time, and the nature of the report desired by the management.
The accounts payable process steps comprise maintaining the vendor file, receiving invoices, verifying the invoices, routing them for approval, and processing the payments. It also involves responding to vendor queries, negotiating the terms, and ensuring that the payments are made on time.
- Accounts payable and its management are crucial for the smooth functioning of any business entity.
- It allows businesses to manage cash flows better.
- Frauds and theft can be avoided by adhering to the process strictly
- For maintaining accurate and complete financial statements of any company, the accounts payable balances have to be recorded with complete accuracy.
Importance of accounts payable process:
It is crucial to maintain an appropriate record of accounts payable information. It primarily involves taking charge of paying the bills periodically. This is crucial to develop a strong credit and long-term relationship with the vendors. Only when the invoices are cleared on time, the vendors will ensure a constant flow of services and supplies. This in turn helps in developing a systematic flow of business.
A good process ensures that there are no overdue charges. Appropriate organizing ensures that the invoices are tracked and processed accurately. This will help in avoiding missing payments and making the same payment twice. It also permits businesses in managing cash flows better.
For a financial statement of a company to be accurate and complete, the accounts payable balances have to be recorded without any errors. The information entered has to be double-checked for accuracy. If there is any omission or double-entry of a particular invoice, there will be a discrepancy in the financial statements and the loss reported will be huge than actually incurred. Hence, it is vital to carry out a proper recording of the expense and tracking the payments.
Accounts Payable Process:
The entire process has several manual process steps and it involves multiple individuals across the organization. The accounts payable begins soon after a company has decided to procure goods or services on a credit basis. Here are the following steps involved in the process.
- Evaluation of the credit policy of the supplier in terms of cash discount on early payment, delayed payment charges, credit days allowed, and more
- Finalizing the supplier and procurement of goods as per the process followed by the business
- Accounting of invoice in the books once the goods have been delivered
- Paying special attention to recording the due date within which the bills have to be paid
- Tracking the bills nearing the due date
- Accounting the payments made in the books to keep a track of invoices against which the payments are honored
- Sending acknowledgments such as payment advice or any other statement for informing the suppliers about the payment made.
What do you mean by accounts payable full cycle?
The term full-cycle refers to the process of completing the purchase on a historic order listed as accounts payable. The process involves accounting of all the administrative work vital for completing a purchase such as verification of documents, approval of invoices, issuance of checks, and recording payments made.
Examples of accounts payable:
There are hundreds of different kinds of payables recorded by a business. The information about accounts payable in the balance sheet can be found under the liabilities section. These are generally short-term obligations that the company has to clear quickly for balancing their books. Here are some examples which will give you an idea about why a business may owe money to its vendors and partners.
Fuel/raw materialsWhenever a manufacturing company invests in raw materials, the items are purchased on credit as they have not yet earned the cash required for purchasing the production materials. This is referred to as accounts payable and usually carries a credit period of about 30 days or more.
Logistics and transportationWhen a company has to transport its produced goods or raw materials, it is quite common to rely on transportation providers as a part of the accounts payable credit agreement. The businesses pay for the cost of logistics at a later stage.
SubcontractingWhenever a business partners with another company for filling its workforce gaps, it is done regularly via accounts payable. The subcontracting work takes place on the basis that the company will pay for the work in the future at a specified time.
EquipmentThe leasing of equipment is commonly done via accounts payable. Whenever a business requires new equipment, they are provided on the condition that they clear the payment within a specific period.
Accounts payable indicates a running balance of the money owed by a business for the goods and services availed from another. Whenever a business seeks goods and services of another, it logs the transaction as accounts payable and clears the payment at a later stage. The counterpart service or goods provider logs the transaction under accounts receivable. Accounts payable management has to be taken seriously if a business wants to maintain a good working relationship with other vendors in the long run.
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