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6 Min. Read

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

This article will also discuss:

What Do Accounts Payable Do?

How to Manage Accounts Payable Effectively?

What Is Accounts Payable on a Balance Sheet?

What Do Accounts Payable Do?

The Accounts Payable Process involves nearly all the company’s payments outside of payroll. The mission of accounts payable is to pay only the company’s bills and invoices that are legitimate and accurate.

So, before a vendor’s invoice is entered into a business’ accounting records and scheduled for payment, the invoice must show:

  • What was ordered
  • What was received
  • Proper unit costs, calculation, totals, terms

For a company’s financial statements to be accurate and complete the accounts payable process must also be efficient accurate. Due to double-entry accounting, an omission of a vendor invoice actually causes two accounts to report incorrect amounts.

If an expense is not recorded in a timely manner:

  • the liability will be omitted from the balance sheet
  • the expense will be omitted from the income statement

If the vendor invoice is recorded twice, there will be two problems as well the liabilities will be overstated and expense will be overstated.

How to Manage Accounts Payable Effectively?

Paying bills is a part of all business no matter what their size. An Accounts Payable department manages incoming invoices and processes payments of those bills. Implementing business procedures to streamline an accounts payable process can streamline an accounts payable process and prepare a company for future growth.

Here are five strategies to manage accounts payable:

1) Simplify Your Accounts Payable Process

Reducing the number of check runs (the process of printing checks to pay invoices and posting them in the General Ledger) to twice a month can help you simplify your accounts payable process. When a check run is prepared, invoices should be backed up in the records and approved by appropriate department heads.

An accounts payable department should be aware of ceilings for each check run, so they can select the most important invoices to pay. A department that is empowered to make decisions will make the process easier by making decisions like making partial payments on larger balances or delaying payments to vendors who have a higher tolerance on due dates.

2) Reduce Accounts Payable Fraud

Accounts Payable can be at high-risk for company fraud. Fraud often occurs when a dishonest employee sets up a “dummy vendor”. Invoices for services never provided are created and when a business pay these invoices, essentially, they are paying the dishonest employee.

Implementing procedures and policies can safeguard your business and mitigate risk. Have a system in place so that the person checks do not also have the ability to set up new vendor accounts. Each vendor account set up should require an explanation to owners prior to creating them.

Proper approval by department heads, separation of duties and spot checks will help reduce the risk of fraud.

3) Vendor Terms May Be Negotiable

Usually invoice will come with a due date of the next 30 or 60 days. Regardless of the terms given, a company can negotiate terms. If a company purchases large volumes on a regular basis, a vendor may offer discounts or special terms. If a company is going to be late with a payment, it is best if they contact the vendor to maintain the relationship and to see if anything can be negotiated in regards to the late payment.

4) Reduce CFO Impact to Verification & Signature

Usually, a Chief Financial Officer (CFO) signs the check but doesn’t assemble the check run. The Accounts Payable department should be running the aging, choosing which invoices to pay, assembling the invoices, printing check and verifying that all invoices are approved before getting them to the CFO.

CFO simply check the invoice amounts against the check before signing. If a company manages cash more actively, let Accounts Payable know up front what their budget for the check run is, so they will know what vendors can wait until the next check run.

5) Use Technology

Using accounting software can help you analyze your accounts payable easier and reduce errors such as incorrect amounts, entering the wrong check numbers used to pay vendors and paying too early or too late. Enter payment terms for each vendor in which the system can default to, such as Net 30 or Net 60.

Software can make it easier to run aging reports, so you have a better idea of what’s in your company’s pipeline.

What Is Accounts Payable on a Balance Sheet?

A company’s short-term debt or money owed to suppliers, vendors and creditors is an Accounts Payable.
On a balance sheet, Accounts Payable is shown as a Current Liability. It is referred to as “current” because these debts are due within a year or less.


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