Want To Know More About Accounts Payable For Your Business?
Updated: Apr 28
Accounts Payable (AP) is one of the main features of the accrual accounting method. Having effective AP processes in place makes the work of your finance team much easier.
Why? Because it gives startups/businesses an overview of all the costs and expenses for a specific period.
In larger companies, Accounts Payable is usually an entire department within Finance. But in smaller entities or startups, tasks are generally combined with Accounts Receivable, and handled by one team.
Let’s take a look at some of the key terms and processes that crop up in Accounts Payable. We will also share some examples with you to give you a better idea of how to manage AP in your business.
What Are Accounts Payable?
Simply put, Accounts Payable are credit purchases that a business pays for within an agreed amount of time. Essentially, they are a type of short-term debt that the company owes to its suppliers.
So whenever a business buys any goods or services from a supplier, the outstanding amount gives rise to Accounts Payable. AP is treated as a liability, and on a balance sheet, it falls under current liabilities.
What Are Current Liabilities?
Current liabilities on the other hand are liabilities that are payable within one year or one normal operational cycle. They are considered short-term and are typically settled using current assets, which are also used within one year.
What Is A Balance Sheet?
A balance sheet is one of a company’s three main financial statements. It provides an overview of the assets, liabilities, and shareholder investment at any given moment in time.
Examples Of AP Accounting Entries
Whenever a business purchases from a vendor on credit, whether for physical goods or services, this creates a payable.
An example of payables is purchases of stock from a supplier, or retainer agreements like a subscription, or a set of instalment payments.
They could also be a raw material purchase, jobs done (like maintenance work), or licensing and leasing.
What Is The Accounts Payable Department?
The term accounts payable also refers to the department in a business that handles vendor invoices and bills and records these short-term debts in the general ledger.
The Role Of The AP Department
When a business purchases goods on credit from another company, the AP department will make sure that the correct bookkeeping entries are made into the accounting system.
The department also ensures that the outgoing creditors' payments are made on time and for the correct amounts.
On top of this, the AP department monitors the cash flow to ensure that future payables will not negatively impact the business’s financial position.
So what exactly is the role of an Accounts Payable Clerk? While the specific job functions depend on the size of the company, accounts payable departments generally cover two areas:
Distributing internal reimbursement payments is a key function of accounts payable. This includes administering petty cash, as well as processing all the sales tax exemption certificates.
Employees must hand in receipts, manual logs, or reimbursement requests in order to receive an internal payment. This can include things like office supplies or cheeky business lunches.
All vendor payments are managed and controlled by accounts payable.
This department organises vendor contact information, payment terms and the Internal Revenue Service W-9 information (which is a document that confirms a person’s taxpayer identification number [otherwise known as TIN]).
The duties of the accounts payable department are to check invoices and verify them against any purchase orders. This is done to ensure that the orders are received before any payments are made to the vendors.
The AP department also handles pre-approved purchase orders. (Although not all businesses use PO’s, it is important to note that information contained on an invoice is always consistent and non-fraudulent).
Another important function of the AP department is to produce reports at the end of each month called an ageing analysis. This document showcases all the information regarding the various amounts owed by the startup/business.
What Is The Accounts Payable Process?
Below is a list of some of the main responsibilities that fall under Account Payable:
Maintaining the master vendor file
Receiving and filing vendor invoices
Adding invoices into an accounts payable automation system
Verifying invoices and matching them against the purchase orders
Reviewing and approving accounts
Handle all vendor inquiries and negotiate payment terms with them
Maintaining and managing all internal controls for internal payments
Before making any vendor payments, an accounts payable department needs to go through a step-by-step process:
Receive the invoice for payment
Track the quantity and validity of what was received
Ensure that all details on the invoice are correct
Update any ledger accounts based on the invoices received. An expense entry is usually required
Process the payment on or before the due date
The AP department requires specific controls to be in place to ensure they don’t pay inaccurate or fraudulent invoices. This extends to making sure no invoice is paid twice and that all invoices are correctly accounted for.
Without sufficient control processes, AP may pay inaccurate amounts, creditor balances may become overdue, or the business’s cash flow may suffer.
Recording AP Entries
By now, you know that it’s essential for businesses to keep a close eye on their AP controls and processes. This ensures that cash flow is optimised and supplier and vendor payments are dealt with efficiently.
A great way to automate entries and maintain accuracy while reducing manual error is to use software or an app that integrates with your larger accounting system.
Sweep streamlines the AP process through its intuitive platform. You can digitise your supplier invoices, automate AP entries, and save up to one day per week in document processing time. It is invoice automation, workflow management, and payment processing in one simple platform.
So basically, accounts payable is the process of managing outgoing payments to suppliers and service providers for a startup/business.
Depending on the size of the organisation, it can be a single Accounts Payable Clerk, or a whole department that handles payments and all the information and details relevant.
If you would like to know more about Sweep’s solution for Accounts Payable, get in touch with us for a demo today.
By utilising the right platform, you can manage your business’ AP process hassle-free.