Accounts payable and its management is one of the critical business processes through which an entity manages its payable obligations effectively. Accounts payable is the amount owed by an entity to its vendors/suppliers for the goods and services received. Once an entity orders goods and receives them in advance before making the payment, it should record a liability for the invoice amount.
So we can say, the short-term liability due to the suppliers, vendor etc is accounts payable. Once the payment is made to the vendor for the unpaid purchases, the corresponding amount is reduced from the accounts payable balance.
Why are Accounts Payable and its management important?
Accounts payable and its management is one of the vital processes in any entity to run the business smoothly. It is important for any business because:
- It primarily takes charge of paying the entity’s bills on a timely basis. This is very important so that strong credit and long-term relationship with the vendors can be maintained.
- Only when the invoices are paid on time, vendors will ensure an uninterrupted flow of supplies and services which in turn will help in the seamless flow of business.
- Good accounts payable process ensures there are no overdue charges, penalty or late fees to be paid for the dues.
- Organized accounts payable process ensures all the invoices due are tracked and paid properly. This will avoid missing payments or paying an invoice twice.
- It also enables the entity to manage better cash flows (i.e. making payments only when due, using the credit facility provided by the vendor, etc.)
- Frauds and thefts mostly happen when money is involved. It can be avoided to a greater extent by following a stringent accounts payable process
For a company’s financial statements to be complete and accurate, the accounts payable balances should be recorded with high accuracy.
The process of dealing with these payables must be efficient and accurate. If there is a double-entry of an expense or omission of a particular invoice, the financial statements will not report the correct amounts and the damage will be big when the numbers are huge. Hence, proper recording of the expense and tracking of the payment is necessary.
Accounts Payable Process
Every entity will have an accounts payable department and its structure depends upon the size of the business. Accounts payable section is set up based on the probable number of vendors & service providers, the volume of the payments that would be processed for a period of time and the nature of reports that would be required by the management.
For example, A small entity with less number of purchase transactions would require a basic accounts payable process. i.e
Receiving the goods/service along with the invoice → booking the expense in the ledger → making payment when due after obtaining the manager’s approval → knocking of the expense account.
Small entities do not require any accounting software. Just maintaining hard copies of the invoices when possible is usually sufficient.
Whereas, accounts payable department of a medium/large enterprise will have a set of procedures to be followed before making the vendor payment. Set guidelines here are essential because of the value and volume of transactions during any period of time. The process involves:
Receiving the bill:
In the case of goods, the bill/invoice helps in tracing the quantity of goods received. The validity of the bill can be known too.
Scrutinizing the bill for details:
The vendor’s name, authorizations, date, and requirement matching with the purchase order can be verified.
Updating the records for the bills received:
Respective ledger accounts need to be updated based on the received bills. Here, an expense entry is usually required to be made. Certain accounting softwares requires managerial approval at this stage. The approval hierarchy will be as per the bill value. It needs to be ensured that a correct general ledger account is used for posting this entry in the software. As a precautionary step, large companies usually follow the maker and checker concept for posting.
Making timely payment:
As and when the due dates arrive (based on a mutual understanding with the vendor/supplier/creditor), the payments need to be processed. Here, the required documents need to be prepared and closely verified. Details entered on the cheque, vendors bank account details, payment vouchers, the original bill, purchase order/agreement, etc need to be scrutinized. Authorized person’s signature (through system or manual) also needs to be obtained sometimes.
Once the payment is made, the related vendors account which is showing payable is stricken off (liability in the books is reduced).
The above-mentioned procedures are organization specific. They can be more elaborate for large companies with more approvals required. These steps before a payment is made are important in order to avoid errors and frauds.
Automated Accounting Process
As accounts payable process is vital for every organization, it requires a lot of employee time to be spent on successful implementation of this process. In order to set efficient accounts payable process automation becomes necessary. This will minimize the time and cost of invoice processing, employee headcount and much more. Automation will also help to reduce a lot of human errors and increase the efficiency of the employees.
There are many good accounting softwares available in the market which can streamline the accounts payable process. Such accounting softwares will eliminate all paperwork. Using electronic invoices, scanned copies of reports, email approvals, etc will not only reduce the time involved in managing the payables but also will help in streamlining the business as a whole. They integrate with the organizations ERP usually. There are a lot of other value added services which can be utilized from these accounting softwares which will ultimately improve the business efficiency.
In simple words, most of the accounting software for payables will allow you to gather reports on outstanding payables, payment history, vendor balance tracking, forecasting outflows and much more.