When companies make purchases from vendors on credit that has to be paid back in the near future, the accounting entry is referred to as accounts payables. This number is added under current liabilities in the balance sheet. A company’s accounts payables department is responsible for issuing payments owed to vendors and suppliers.
In this post, we’ll take a look at what accounts payable is and how you can better manage this liability to monitor and improve your company’s liquidity and profitability.
What is accounts payable?
Accounts payable (AP) refers to the total amount of money you owe vendors, such as incoming bills and invoices. It enables you to keep track of the credit that vendors have given you. Commonly referred to as AP, these debts are shown in your company’s books as payables. In simple terms, a payable is an invoice you need to pay.
For example, let’s say you buy raw materials from a supplier. You don’t pay the supplier upon receiving the raw materials. Instead, the supplier issues an invoice that details the due date for the payment. The AP account in your books tells you which vendors you owe money to, how much you owe them, and when you need to pay by.
The accounts payable department (or individual if you run a small business) handles more than just paying invoices and incoming bills. For example, the accounts payable department can also be responsible for handling other tasks such as travel expenditures, distributing internal payments, managing petty cash, and handling the distribution of sales tax exemption certificates.
Why accounts payable is important
You need to keep track of how much money you owe vendors as it’s an important factor in calculating the profitability of your business. If you’re typically carrying accounts payable higher than your cash on hand, this means that you often owe more money than you make. In situations like this, you may need to defer purchases if you’re unable to pay off payables on time. Data from accounts payable can help you with budgeting and planning and allows you to avoid situations where you have low available cash to cover expenses.
The accounts payable process
The AP department of a company follows an established set of procedures before paying vendors. This allows them to stay on top of the amount (and volume) of transactions during any time period.
Here’s a brief explanation of the accounts payable process:
- Receiving and reviewing bills and invoices. After purchasing supplies from vendors, the bill tells you the number of goods that were received. You need to make sure that the bill includes the supplier’s name, description of items purchased, authorization, terms of payment, invoice date, and due date.
- Updating records. Update ledger accounts on the basis of the received bills and create a relevant expense entry in your records. This may require approval from management along with written approval attached to the bill value.
- Making payments. All payments should be issued by the due date according to the terms agreed upon between the vendor and the purchasing company. Prepare and verify the required documents beforehand. Carefully inspect the details mentioned on the check, payment vouchers, the original bill, vendor bank account details, and purchase order. Authorization from management may be required to issue the payment.
There are also some security risks to the accounts payable process. To ensure the safety of your company’s cash and assets, the AP department should implement internal controls to prevent inaccurate or fraudulent invoices or paying back a vendor twice. Additionally, steps should be taken to make sure that all vendor invoices are accounted for by updating and monitoring invoice records regularly.
With Ablii, you can simplify your payables process by sending online payments. The platform updates your accounting software after each transaction, so you don’t have to worry about manually entering payment details.
Quick tips for managing accounts payable
Improving accounts payable management makes it easier to:
- Pay vendors on time
- Remain profitable as a business
- Free up more time to focus on core business activities
Here are some actionable tips for better managing accounts payables:
Tip #1: Set up an accounts payable system
Make each invoice entry using the same method in your records. Set up an accounts payable system and monitor your outstanding invoices. You should know exactly which vendors you owe, how much money you owe them, and when the money is to be paid.
Tip #2: Create reminders
Set reminders for approaching payables’ due dates. The easiest way to do this is by using a calendar app. This allows you to stay on top of payments and better manage your business cash flow. Always remember to check the payables’ due dates on a regular basis and keep an eye out for outstanding invoices.
Tip #3: Keep a lookout for discounts
Closely monitor early payment discounts in vendor invoice payment terms. Often times, vendors offer discounts if the payment is made before the due date. These discounts add up over time which is why it’s a good idea to take advantage of the opportunity. However, before making early payments to vendors, make sure that you have enough funds in your bank account to continue running your business without any financial stress.
Which tools do you use to track your accounts payables? Let us know by commenting below.
