The accounts payable is an accounting term that refers to the money that a company owes to a vendor or a supplier – for having availed of their products or services.
When a company buys products or services from a vendor with an arrangement to pay later, the amount is called the accounts payable - until the payment is made. It is a form of credit offered by the vendor or supplier.
The account payable is recorded when an invoice is approved for payment. It’s recorded in the General Ledger (or AP sub-ledger) as an outstanding payment or liability until the amount is paid. The sum of all outstanding payments is recorded as the balance of accounts payable on the company’s balance sheet. The increase or decrease in total AP from the previous period will be recorded in the cash flow statement.
Companies closely monitor their AP processes to prevent fraud, ensure timely payments and maintain overall financial health.
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What is Accounts Payable (AP)?
When a company buys products/services from a vendor/supplier with an
arrangement to pay later, the amount is called the account payable, until the
payment has been made.
It is a form of credit offered by the vendor/supplier to the ordering company,
to defer payment until the ordered product/service has been delivered or
even later.
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An example of Accounts Payable
Accounts payable includes, beyond purchase of goods, the following:
● Transportation and Logistics
● Power / Energy / Fuel
● Leasing
● Licensing
● Services (Assembly / Subcontracting)
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The importance of Accounts Payable
AP is important because of the following reasons:
● It ensures payment of bills on a timely basis, which in turn improves the
credit rating of the company and long-term relationships with vendors.
● Timely payment of invoices ensures uninterrupted flow of supplies and
services, which leads to seamless flow of business operations.
● Timely payment avoids overdue payments, penalties and other late fees.
● Organized AP allows systematic tracking of invoices and payments.
● AP eases cash flow by making payments only when due, and using credit
facilities offered by the vendor.
● Stringent AP avoids vendor fraud and theft.
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Components of the Accounts Payable
process
Account Payable is a multistep process and comprises some essential
steps:
● AP commences with the company’s decision to procure goods/services on a
credit system.
● Choosing suppliers who offer credit facilities.
● Comparing the credit policies of the suppliers in terms of credit days allowed,
delayed payment charges, cash discount on early payment etc. and choosing the
supplier with the terms that best suit the company.
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● Following the procurement process – purchase requisition, purchase order,
invoice, receipt – of the business.
● Accounting the invoices/bills in the books as Accounts Payable once the goods
are received.
● Bookkeeping helps with internal and external audits in the company and in
analysing spend patterns, which, in turn helps in financial planning and meeting
standards and regulations.
● Tracking the dates on bills to ensure payment before the due date.
● Making payment before the due date
● Communicating with the vendor that the payment has been made.
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The conventional Accounts Payable
department
A team responsible for manual Account Payable processes is responsible for
recording and processing financial transactions relating to procurement and
suppliers.
A range of professionals are employed for this purpose:
● The data entry analyst inputs the invoices into the digital system once they are
received.
● The payment processing analyst is in charge of paying invoices on the date in
which they are due
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● The exceptions analyst addresses discrepancies in invoices and handles payment
failure issues.
● The vendor management personnel create and manage the supplier database
and correlate it with various procurement operations.
● The Accounts Payable manager coordinates with the team for error-free and
seamless invoice management.
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Challenges to the manual Accounts
Payable process
● Problems associated with manual data entry
● Delays in payment
● Unhappy employees
● Unwieldy information
● Opacity of data
● Fraud proclivity
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Benefits of automating the Accounts
Payable Process
● Time savings
● Cost savings
● Revenue generation
● Reduction of errors
● Flexibility of payment
● Better maintenance of data
● Security
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What to look for in an Accounts Payable
software
● Accurate Invoice Data Capture
● Easy Invoice Approvals
● Ability to track AP invoices in real time
● Integration with existing accounting system
● Automation of payments
● Data storage
