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What Is Accounts Payable?

When a company purchases goods and services from a supplier or creditor on credit that needs to be paid back in a short period of time, the accounting entry is known as Accounts Payable (AP). On a balance sheet, it appears under current liabilities. In a company, an AP department is responsible for making payments owed by the company to suppliers and other creditors.

In this article you will also learn about:

What Is the Role of Accounts Payable?

What Is the Accounts Payable Process?

What Is Included in Accounts Payable?

What Is the Role of Accounts Payable?

The accounts payable departments are responsible for more than just paying incoming bills and invoices. Accounts Payable are usually their own department in larger companies but in smaller businesses accounts payable and receivable tasks are usually combined.

While the size of the business ultimately determines the role accounts payable plays, AP fulfills at least three basic functions in addition to paying bills.

Business Travel Expenses

Larger businesses or business that require staff to travel may have their AP department manage their travel expenses. The travel management by the AP department might include making advance airline, car rental and hotel reservations. Depending on the controls of a company, account payable might processes requests and distributes funds to cover travel expenses. After a business travel has occurred, AP would then be responsible for settling funds distributed versus funds actually spent or for processing travel reimbursement requests.

Internal Payments

Accounts Payable is responsible for distributing internal reimbursement payments, controlling and administering petty cash and controlling the distribution of sales tax exemption certificates.

Employees must turn in a manual log report, receipts or both substantiate reimbursement requests. Small expenses such as miscellaneous postage, out-of-pocket office supplies or company meeting lunch are handled as petty cash. AP often handles a supply of sales tax exemption certificates issued to managers to ensure qualifying business purchases don’t include sales tax expense.

Vendor Payments

Accounts Payable organizes and maintains vendor contact information, payment terms and Internal Revenue Service W-9 information either manually or using a computer database. Depending on the internal controls of a company, an AP department either handle pre-approved purchase orders or accounts payable verifies purchases after a purchase is made. The AP department also handles end-of-month aging analysis reports that lets management how much the business currently owes.

Other Functions

The accounts payable department also work to reduce costs by recognizing details and developing strategies to save a business money. An example is if an invoice gets paid within a discount period that many vendors provide. AP is also a direct line contact between a business and its vendor representatives. Strong business relationships between the two could benefit the company and a vendor might offer relaxed credit terms.

What Is the Accounts Payable Process?

The accounts payable department will have a set of procedures to follow before making a vendor payment. Set guidelines are essential because of the value and volume of transactions during any period of time.

The process involves:

Receiving the bill: If goods were purchased, the bill helps trace the quantity of what was received. The validity of the bill can be known during this time too.

Review bill details: Ensure that the bill includes vendor name, authorization, date and verified and matching requirements to the purchase order.

Updating records once the bill is received: Ledger accounts need to be updated based on the received bills and an expense entry is usually required. Managerial approval might be required at this stage with the approval hierarchy attached to the bill value.

Making timely payment: All payments should be processed before or at their due date on a bill, as agreed upon between a vendor and a purchasing company. Required documents need to be prepared and verified. Details entered on the cheque, vendor bank account details, payment vouchers, the original bill and purchase order need to be scrutinized. A managerial authorization might be required at this point too.

To make sure a company’s cash and assets are safe, the accounts payable process should have internal controls to:

  • prevent paying a fraudulent invoice
  • prevent paying an inaccurate invoice
  • prevent paying a vendor invoice twice
  • be certain that all vendor invoices are accounted for

What Is Included in Accounts Payable?

Accounts Payable is on a company’s balance sheet as a current liability and is a collection of short-term credits extended by vendors and creditors for good and services received by a business. An AP department also takes care of internal payments for business expenses, travel and petty cash.

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