Accounts payable is the entry made in the books of accounts regarding the amount owed by a business to its suppliers on the received goods and/or services. Payables are payments which a business has to make to those suppliers whose invoices are still pending to be paid.
This article discusses the following topics:
Accounts payable is an entry made in accounting which shows the obligation of a business to pay short-term debt to its suppliers for goods and services purchased on credit. If the business places an order for certain goods and services to its suppliers and receives the goods before making payment, the payable amount is recorded as a liability. This short-term liability of a business to its suppliers is referred to as accounts payable.
Accounts payable are recorded under current liabilities in the balance sheet. Upon making the required payment to the said suppliers, the paid amount is subtracted from the balance of accounts payable.
Accounts payable also refers to the department of a business which bears the responsibility for paying off debts owed by the business to its creditors or suppliers. These debits should be paid within the time period specified so as to avoid default payment.
Thus, management of accounts payable is essential to a business so as to avoid drowning in debt.
Proper management of accounts payable helps a business to effectively manage its obligations. A stringent and organized accounts payable is important to the functioning of a business because:
- It ensures timely payment of bills which helps maintain a strong and long-term credit relationship with the business’ suppliers
- It helps in systematic business functioning because suppliers trust a business when it pays its dues on time
- It makes sure that there are no overdue bills, charges, and late fees requiring payment with the dues
- It ensures that all dues are properly tracked and paid on time, which avoids double payment or missing a payment
- It enables better management of cash-flows
- It avoids thefts and frauds to a great extent
Accuracy in recording and paying accounts payable is important because it makes the financial statements of the business accurate and complete. In case of an omission or double entry of any invoice, the financial statements will suffer by reporting incorrect amounts which will lead to huge losses when big numbers are involved.
Every business has a department for accounts payable whose structure depends on the business size. The number of suppliers, volume of payments during a time period, and nature of reports required by the management of a business determine its accounts payable process.
Small businesses will require basic accounts payable processes. Whereas, large and medium businesses will require a more complex set of procedures for managing accounts payable.
Their accounts payable process involves:
- Bill Receipt: Bills and invoices help trace the quantity of received goods and the validity period of the bill
- Scrutiny of Bill Details: The details of the bill such as name of supplied, date of invoice, authorizations, and the raised requirements regarding the purchase are verified
- Records Updated for Received Bills: Ledger accounts are updated with the received bills and an expense entry is made in books of accounts.
- Making Timely Payments: Upon arrival of the due date, payments are processed and the required documents are prepared and verified. A scrutiny is made on the details entered in the cheque, payment vouchers, bank account details of the supplier, purchase order, original bill, etc.
Upon making payment, the ledger account of the supplier should be closed in the business’ books of accounts so as to reduce the said liability from the balance. This amount will then not be considered as a liability.
These procedures grow stricter with the size of the business. More approvals may be required in large businesses than in small businesses. The basic model remains the same for all businesses which helps avoid frauds and errors from creeping into the financial statements of the organizations.
Account payable management requires a chunk of time for its successful implementation. Therefore, automated accounting is usually used by businesses so as to minimize costs, human errors, and time spent on the process of managing accounts payable. There are various automate accounting software applications available in the market which complete the whole accounts payable process for businesses very efficiently. They can be easily integrated with the business’ ERP. Thus, automated accounting increases efficiency by reducing expenditure and further improving the everyday performance of a business.