- Accounts payable are bills a company must pay. It’s the money a business owes suppliers for provided goods and services.
- Some examples of accounts payable include cleaning services, staff uniforms, software subscriptions, and office supplies. Accounts payable does not include payroll.
- The accounts payable process comprises three steps: purchasing the order, receiving the order, and paying the vendor’s invoice.
- This article is for small business owners interested in setting up or streamlining their business expense processes.
“Accounts payable” is an accounting term for the money your business owes suppliers and vendors. All bills and debts, other than payroll, fall into this category, making it a critical aspect of any business.
To ensure your business can produce consistently accurate financial information, you need a dependable accounts payable system. A streamlined and accurate accounts payable process will help your business with short- and long-term goals and financial health.
We’ll examine the accounts payable process and share tips for tracking accounts payable and accessing accounting resources.
Did you know?: Payroll accounting handles all payroll-related business expenses, including employee compensation, payroll taxes, federal benefit withholdings, benefit payments and other deductions.
The accounts payable process
The accounts payable process is crucial to a business’s overall financial health, including its business credit score. “The accuracy and completeness of a company’s financial statements are dependent on the accounts payable process,” noted Harold Averkamp, founder and content author of the accounting advice website AccountingCoach.com. “The efficiency and effectiveness of the accounts payable process will also affect the company’s cash position, credit rating and relationship with its suppliers.”
To create a thorough accounts payable process, understanding the key steps involved is crucial.
- Purchase order: To initiate a purchasing process, the organization’s purchasing department sends a purchase order to a vendor.
- Receiving report: Once the company has received the goods or services purchased, a receiving report is created to document the shipment, including any issues and damage.
- Vendor invoice: Finally, the vendor will create and send an invoice to request payment for the goods or services purchased and received. When the business receives the invoice, it will note the payment terms and process payment within those terms.
src=https://images.businessnewsdaily.com/app/uploads/2022/04/04072250/V1-Info-Navy.png alt=”Tip” width=”75″ height=”75″ align=”left” data-content-img-id=”605102ad9c658add338b4567″ />Tip: While accounts payable represents the money you owe vendors and suppliers, accounts receivable indicates how much cash you’re awaiting from unpaid invoices, which is crucial for your business’s cash flow.
Tracking accounts payable
Many small businesses track accounts payable, sometimes abbreviated as A/P, monthly. However, as a business grows, tracking accounts payable weekly is advised. The increased frequency helps small businesses take advantage of any early-payment discounts included on invoices and resolve credits due to inventory returns.
Here are some best practices for tracking accounts payable and keeping your business’s finances running smoothly:
- Keep accurate accounts payable records. Keep a detailed accounts payable record in case of payment disputes, to remind the business of current or outstanding invoices, or as proof of spending at tax time. Create these accounting reports manually or with accounting software.
- Use excellent accounting software. The best accounting software automates accounts payable and simplifies the process. It can schedule and track payments while controlling who has access to your financial data. It can also reduce errors and speed up the accounts payable process.
- Stay detail-oriented. Working with accounts payable requires excellent attention to detail. Each invoice must be verified for accuracy, billing date and payment date. Invoice details must be entered correctly into the general ledger or accounting software. Hiring skilled accountants and bookkeepers helps ensure accuracy.
- Reference original invoices. Work from the original invoice whenever possible. Some invoices are sent electronically. To avoid mistakes and minimize confusion with electronic invoices, print the invoice and file the initial email.
- Standardize your naming convention. Use the same naming convention or system every time. Follow a consistent, replicable process each time you assign an invoice number in your system. Determine the method, such as using leading zeros, and stick with it.
- Enter every invoice individually. Enter every invoice individually, including multiple monthly invoices from the same supplier. If there’s a dispute, you’ll want to be able to find it easily in your system.
- Get all invoices approved. Before entering an invoice, get approval from the appropriate person. The approving party should be different from the staff member entering the invoice. Ideally, keep these role assignments separate and distinct. However, if you are a sole proprietor who does their books, this may not be possible. In that case, ensure you have a clear process for approval and entry. Keep solid process records to support each role so you’ll be prepared to delegate or outsource this task as your business grows.
- Look for early-payment discounts to save money. Discounts can add up over 12 months. Some vendors offer a slight reduction – usually a percentage of the total amount due – in exchange for receiving payment sooner. If you typically batch all your accounts payable invoices to review and pay at the same time, consider a new system. Find a system that allows you to identify, flag, file and pay invoices with discount terms on a faster timeline.
Cash flow is vital 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.
Key takeaway: Some people are initially confused about accounts payable versus accounts receivable. While accounts receivable is money others will pay you, accounts payable represents what you owe your vendors.
Examples of accounts payable
Accounts payable involves B2B billing. Your company must pay another company for the goods or services it provides. Here are some examples of accounts payable situations:
- Cleaning services: One example of accounts payable is when Company A hires Company B to handle its cleaning needs. In this example, Company A must send regular payments to Company B in exchange for prompt and reliable cleaning services.
- Staff uniforms: Another example of accounts payable is when a business hires another business to produce its staff uniforms. This is an example of a repeat, or periodic, business expense. Staff turnover and lost or damaged uniforms will require additional orders. In this example, Business B invoices Business A when it receives a new order, and then Business A’s accounts receivables department processes payment.
- Office supplies: Many companies purchase office supplies in bulk and set up automatic orders based on use frequency to ensure they never run out of essential supplies. These business owners often have pending payments to their office supply companies to ensure efficient workflow.
- Sanitation: Many businesses pay other businesses to have their garbage and recyclables hauled away. These services are typically weekly.
Tip: Hire a small business accountant who can recognize red flags in your accounts payable process and streamline your business finances.
Additional accounting resources
Further information on handling accounts payable can be found in the following articles:
- What Is an Accounts Payable Aging Report?
- How to Define Accounting for Businesses
- Accounting Ratios and Formulas: The Basics You Need to Know
- What’s the Difference Between Cash Basis and Accrual Basis?
- What Is the Accounting Cycle?
Adam Uzialko contributed to the reporting and writing in this article.