Accounting balance sheets are full of important categories, and one that carries significant weight is accounts payable. Accounts payable is how all money that is owed to vendors and suppliers who keep your business running is tracked. Getting it right is essential for gaining an accurate view of your bottom line.
The Basics Of Accounts Payable
Accounts payable is a collection of the short-term credits that have been extended to a business by vendors and creditors for services and goods that have already been received. It appears on a company’s balance sheet as a current liability.
Internal Payments
Accounts payable is responsible for distributing internal reimbursement payments. For example, the accounts payable department may administer petty cash that covers small expenses such as company meeting lunches and out-of-pocket office supply purchases. This department is also in charge of managing reimbursement requests submitted by employees.
External Payments
Accounts payable is also responsible for organizing and maintaining the payment terms, contact information, and tax information of various vendors. Accounts payable may handle pre-approved purchase orders and verify purchases after they have been made and carry out analysis at the end of each month to demonstrate to management how much money the business currently owes.
Business Expenses
Business expenses such as travel may also be managed by accounts payable. For example, accounts payable can process requests and distribute the funds for the airline, hotel, and car rental reservations.
Cost Optimization
The accounts payable department can use its analysis of expenses to find ways to reduce costs.
For example, they may note that some vendors offer discounts for paying invoices early and strive to meet this discount period to save the business money. They can also work on relationships with vendor representatives that may benefit the company in terms of more relaxed credit terms.
How Does Accounts Payable Work?
An accounts payable department establishes a set of procedures that are followed prior to making any vendor payments. Below is a look at what is typically involved in the process.
Receiving The Bill
In the case of goods purchased, a bill lays out the names and quantities of the items received. If the transaction involves services, these will be listed and described.
Reviewing The Bill
Businesses should ensure that the bill they receive includes the name of the vendor, the date, and some form of authorization. They should verify that what they received matches what is outlined on the bill.
Updating Records
Once the bill has been received and reviewed, the ledger account should be updated by creating an expense entry. If managerial approval is required, it should be obtained at this point.
Making Timely Payments
Ideally, all payments will be processed before or on their due date as per the agreement with the vendor. Any required documents should be verified, and the details of the transaction need to be entered on the check. Internal controls should be in place to prevent paying inaccurate, fraudulent, or duplicate invoices.
How Does Accounts Payable Differ from Accounts Receivable?
Accounts payable is essentially the opposite of accounts receivable. This is the money the business owes to its suppliers, whereas accounts receivable are the funds that other parties owe the company. When one company lists a particular bill as an account payable, the other business involved in the transaction will list that same bill as an account receivable.
The Importance Of Accounts Payable
Accounts payable is important because it represents short-term debts or obligations that a company owes. It can also identify areas where cost savings can be made. For example, if the accounts payable section grows over time instead of decreasing, it can indicate that a company is buying more on credit and that changes may be needed.
In contrast, a declining accounts payable number can show that a business is not spending beyond its means and is paying creditors back quickly. These are important distinctions when it comes to the proper management of your company’s cash flow.
Although paying supplier bills as soon as they come in is ideal, some business managers might use accounts payable data to help cash flow suit their current needs.
For example, if your company is going to launch a new product and needs healthy cash reserves, management may opt to delay paying outstanding accounts payable so the funds can be used for the project. Management must be reasonably confident they will still be able to cover the accounts payable later or this approach could backfire.