Accounts payable are the bills and other debts that the business needs to pay. As a matter of fact, the only thing that a business pays that is not considered accounts payable is payroll. Everything else falls under the category, making it a critical aspect of your business.
"The accuracy and completeness of a company's financial statements are dependent on the accounts payable process," said Harold Averkamp, founder and author of accounting advice website Accounting Coach. "The efficiency and effectiveness of the accounts payable process will also affect the company's cash position, credit rating and relationship with its suppliers."
Implementing a dependable accounts payable system will produce accurate financial information you need to plan for both the short and long term. Here's what you need to know about keeping up with your business debts.
Tracking accounts payable
Accounts payable, sometimes abbreviated as A/P, is tracked monthly for many small businesses, but as the business grows, it is better to make it a weekly task to take advantage of early payment discounts and resolve any credits due to inventory returns. It is handy to keep a record of accounts payable in case there are any payment disputes, to remind the business of current or outstanding invoices, or as proof of spending at tax time. These records can be kept manually or with accounting software.
Working with accounts payable requires great attention to detail. Each invoice needs to be verified for accuracy, billing date and payment date, and then entered correctly in the general ledger or accounting software. Based on our research, here are some general tips to set up your accounts payable and help the process run smoothly:
Work from the original invoice whenever possible. Some invoices are sent electronically. With electronic invoices to avoid any mistakes, print the invoice once and then file the email away to minimize confusion.
Use the same entering system every time. Each vendor has its own system of invoicing but assigning the invoice number in your system should be consistent. Determine the method, such as using leading zeros, and stick to it.
Look for early payment discounts to save money. It can add up by the end of the year. Some vendors offer a small percentage off the invoice if you pay it within a specified time frame from the invoice date, such as within 10 days. If you typically only work with accounts payable once a month, consider a system in which you identify early payment discount opportunities when the invoice is received and pay those separately from the monthly pile.
Cash flow is important to a small business. A solid system of monitoring and paying accounts payable gives you a clear picture of your expenditures against your revenue, enabling better business decisions.
The accounts payable process
These are the steps of the accounts payable process, according to Untapped:
Purchase order: In order to initiate the process, the purchasing department of a company or organization sends the purchase order to the vendor.
Receiving report: From there, one the company has received the good or service, they create a receiving report, which documents the shipment including any issues, damages, etc.
Vendor invoice: Lastly, the invoice is sent by the vendor in order to request funds. Once accounts payable receives the invoice, they are given a certain amount of time to pay all or a portion of the costs in the case of big-ticket goods and services.
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