What Is The End To End Process Of Accounts Payable?
Updated: Oct 17
At first glance, the end to end process of accounts payable sounds a lot like accounting 101. And the good news is that what you’re about to read is going to get you clued up on how to ace what may seem like a bit of a tricky topic.
To give you a comprehensive understanding of the concept from start to finish, let’s begin by looking at the basics. Then we’ll take a deep dive into the thick of what this process entails. We have even included a couple of examples to give you a real 360 idea of this concept.
Let’s get started.
What Is Accounts Payable?
Simple. Accounts Payable is any amount owed to a company for a product purchased or service completed. Companies have credit with a list of vendors that they need to pay it back within a short period of time.
In the accounting world, when thinking about accounts payable, the term is also used to recognise the employees who process the invoices for service providers.
AP amounts appear in the company's balance sheets and give management a birds eye view of the financial state of business. This provides a better understanding of the cash flow and change in financial position from the previous month. Ultimately, it also makes room for better future cash flow planning, as management can pick up upcoming due dates.
Is Accounts Payable A Debit Or Credit Entry?
It’s both really. This is because it is considered a liability account. A credit balance shows that the business owes money to its suppliers. When you go on to pay off the amount you owe, the payment is then recorded as a debit entry.
What Does The End To End Process Of Accounts Payable Entail?
There are typically four steps in the end to end process of accounts payable:
What’s Important When It Comes To Financial Statements?
When it comes to a company’s financial statements there’s quite a bit of dependency on the following factors:
The processing of invoices needs to be done in a timely manner and it needs to be consistent on a monthly basis.
General ledger accounts
This is a record that summarises, organises and stores all the company’s transaction information, so it always needs to be kept up to date.
Speaks to services rendered but that still need to be invoiced, and provision has been made for payment at the end of a financial period.
Essentially, the accounts payable process needs to run smoothly because it has a direct impact on the company’s credit rating, cash flow, and relationships with vendors.
Examples Of The Accounts Payable Process
Still not quite sure what accounts payable is? Here are three examples that you could encounter.
Let’s say that you’re a startup and you’re leasing a printer for your office instead of buying one. If the agreement you enter into with the printer company gives you room to pay for rental 30 days from statement, this is an example of AP in action.
Logistics and transportation
Let’s use online stores for another example. When a customer places an order, goods need to be collected from a warehouse and then delivered.. If the transporter handling the shipment gives the online shop extended payment terms, this goes to the Accounts Payable balance.
You might be in the business of making items but require the finished product to be assembled by a different company. If you are outsourcing this work in bulk, again your business might seek out extended payment terms with the contractors.
Are You Able To Streamline Accounts Payable?
Because the end to end process of account payable requires so much attention to detail, it needs to run like a well oiled machine. There are a few best practices that can be followed to allow teams to function optimally and avoid making any major errors.
Setting up notifications as part of the end to end process to guard against missed payments is a great way to ensure you never miss a payment deadline; and this may also give you early payment discounts. When the business is working in considerable figures, the discounts can turn out to be a worthwhile saving.
Drawing reconciliation reports of your payment history is super handy to show the overall cash flow for the month, and it sets you up for future audits.
Go green and optimize on the digital invoicing route. There are endless options in terms of software and applications to use to avoid heaps of paper on your desk, which saves a couple of trees and keeps all your documents in a central place (i.e. the cloud). This is especially important for remote workers who are able to scan in and submit their AP documents, which are then automatically loaded into the wider accounting system.
Let’s do a recap. Accounts Payable is the term used to describe any amount owed to a company for products purchased or services provided.
There are four aspects to the process; namely, receiving invoices, reviewing invoices, approving invoices and paying suppliers.
Having an effective accounts payable process in place is key for a company’s credit rating, cash flow and relationships with vendors.