Accounts Payable (AP) Defined
Accounts payable (AP) is an accounting word used to denote the amount due to suppliers or vendors for purchasing goods or services through credit. The total of the outstanding payment owed by an organization toward its vendors is reported as the accounts payable’s balance on the balance sheet. The change or decrease in the total AP over the preceding period will show as cash flow statements.
It is essential to be attentive to your AP expenditures and maintain internal controls to safeguard your assets and cash and make sure you don’t pay for incorrect invoices. Maintaining a well-organized and efficient accounting process is crucial to ensure you are conscious of the impact AP affects your bottom account.
In this blog, we’ll address these questions:
- What is an Accounts Payable Invoice?
- What Does Accounts Payable Do?
- What is an Example of Accounts Payable Expenses?
- What is the Accounts Payable Process?
- What is the Invoice Management Process?
- What is the Relationship Between Cash Flow and Accounts Payable?
- What is the difference between accounts payable vs. accounts receivable?
What are an Accounts Payable Invoice?
An invoice for accounts payable is a demand for payment that an individual supplier sends to the accounts payable department. These invoices generally represent due for outstanding amounts of specific goods or services bought.
What Does Accounts Payable Do?
The department’s accounts payable job is to provide administrative, financial and clerical assistance to an organization. The department is responsible for managing every aspect of accounting payable. This is an essential role for the accounting division of the business. It involves the processing and approval of payments and reconciliation of invoices from vendors.
Every responsibility on the account payable team can help improve the process of making payments and to ensure that the payment is only made on authentic and accurate invoices and bills. A well-trained and properly managed accounts payable department could help your company save a lot both in terms of money and time when it comes in your AP process.
With the help of automation, AP teams are able to quickly decide which invoices to be paid (to prevent charges for late payment or take advantage of discount coupons for early payments) as well as the best way to pay (via cash, paper checks or with virtual cards, which get cash-back rebates). Companies, in turn, have more control over their cash outflows and could even change AP from cost-centers to profit-making center.
What is an Example of Accounts Payable Expenses?
The accounts payable vary from other kinds of current liabilities, such as accruals, short-term loans proposed dividends, and bills of exchange due. Examples of the expenses of accounts payable can include (but they are not restricted to) items such as:
Transportation and Logistics
Power / Energy / Fuel
Products and Equipment
Services (Assembly / Subcontracting)
If any of the products or services above be purchased with credit for your business it is essential to promptly record the purchase to AP. This will ensure that your balance sheet is current and accurately reflects the amount due to your suppliers, which will allow transparency in your book-keeping efforts and the accounting process.
What is the Accounts Payable Process?
The entire process of accounting payable comprises 4 distinct phases:
invoice capture: The majority of the time, invoicing capture requires manual entry of the invoice information (vendor details line items, amount and the GL code) into an accounting system. This poses risks due to the accuracy of data and human errors.
Invoice ApprovalInvoice approval involves reviewing and approval of invoices from suppliers. Most of the time it is the case that someone in the AP team will walk the invoice through the office to secure the required approvals. This is done prior to the posting of the cost in the ERP system and the payment being sent.
Pay AuthorizationOnce there is an invoice that is ready to be paid You must obtain approval to complete the payment. This will include the date on which when you’ll submit for payment. It also includes the method of payment and the amount of the payment.
Payment ExecutionFollowing the authorization for payment and payment of the invoice, the invoice is then paid and the remittance information is given back to the merchant. It is common for this to involve printing, signing and sending checks, establishing ACH to the bank or processing credit card transactions. The invoice is then removed from the system and deposited into different repositories.
Accounts Payable as opposed to. trade payables
Though some people employ the terms “accounts payable” and “trade payables” to refer to the same thing both terms are very similar, but in slightly different scenarios. Trade payables are the amount the company owes its suppliers in exchange for inventory-related products, including equipment or business supplies that make up the inventory. Accounts payable comprise all short-term obligations or debts.
For instance, if a restaurant is in debt to the company that makes food or drinks these items form included in the inventory and therefore, part of the trade payables. However obligations to other businesses like the one who cleans the restaurant’s uniforms, fall under the category of accounts payable. These two categories are part of the broad category of accounts payable which is where many businesses combine both under the name accounts payable.
Accounts Payable as opposed to. Repayable
Receivables and accounts payable are in essence opposites. The term accounts payable refers to the money the company owes its suppliers and accounts receivable are the money due to the business usually by the customers. When a company contracts with another company on credit, one company will make the account payable transaction on their books , while the other will record an entry for accounts receivable.