5 Things to Know About How Accounts Payable Works
There is sometimes a little confusion as to what an account payable is and what it is not. An account payable is an open account that includes an unpaid balance a company used to buy goods or services. Each time credit is used to obtain these goods or services, the balance of the accounts payable account will increase.
The following is a few basic facts about accounts payable to assure your company is using this common business practice in an effective and proper manner.
What is included In Accounts Payable
All procurements purchased on credit qualify for accounts payable. The norm is for these purchases to facilitate sales and production. Orders are usually on a scale that makes it unlikely for these purchases to be executed with cash.
There are usually payment terms attached to these procurements. Net 30 is common when the selling company desires to be paid in a calendar month. In other instances, monthly installment payments are mandated.
Cash payments are not to be included with accounts payable.
The Expense And Accounts Payable Difference
Many workers are confused regarding the difference between accounts payable and expense accounts. Each of these accounts tracks money that is leaving a business. However, that is pretty much where the similarities end.
Accounts payable is a written record of money that is owed to a creditor or company. This money has already been spent but has not been paid. This is important to understand because on a balance sheet, a liability like accounts payable, is subtracted from the value of assets owned by a business to determine owner equity as well as the value of the business.
Expenses are often connected to revenue generation and include money that has already been paid out by the business. Wages and bills for utilities are two common examples.
Accuracy Checks
One simple to use safeguard to assure the accuracy of accounts receivable is known as three-way matching. This method is ignored by many companies due to the amount of labor involved.
Three documents are needed to determine whether a transaction should be included as an account payable or expense. The documents are an invoice, a shipping order, and a purchase order. The purchase order designates credit was used to purchase a product. A shipping order means the product is in your position. An invoice reminds you that payment for the item is pending.
It is possible to automate the process of three-way matching to save time if you must examine many purchases on a regular basis.
Purchase Orders
In the past, the unit price of a product being purchased, the total number of units ordered, the address of the supplier, and the total value of the transaction was all that was needed on a purchase order.
Purchasing forms today ask for additional information including tax information, shipping terms, inventory codes, currency exchange information, and more. Many times these forms are inaccurate or not complete when submitted. But taking the time to assure these forms are correctly submitted will save a lot of time and trouble at a later date.
Automation Benefits
People unfamiliar with current trends in technology may find it awkward to automate the accounts payable process. But once the system is in place, your business will benefit from more accurate and faster documentation.
A heavy workload will sometimes cause individuals who have to manually track accounts to look for shortcuts and even guess at certain information. The potential negative effects of this behavior are easy to imagine. Automation of the process will eliminate guesswork and prevent worker fatigue.
The Bottom Line
Despite the fact accounts payable is a critical part of the bookkeeping process for a business, much confusion exists pertaining to these accounts. The five fundamentals explained above will eliminate the confusion over the process and allow for accurate and effective accounting of accounts payable.
