Accounts Payable Explained

Accounts Payable is simply put a liability to a creditor for purchased goods or services. Under the accrual method of accounting, the company receiving the goods or services must report the liability no later than the date they were received.   Hence, the expenses are reported when they are incurred, not when they are actually paid.

It is important that your company have a system in place to ensure only legitimate invoices for accurate amounts are paid. The process should include review of purchase orders, receiving reports, invoices and contracts that affect payments. You should never pay from a statement for example – only from an actual invoice. Paying from a statement can lead to double payments if a payment has been made but not yet recorded by the company issuing the statement. A good accounts payable clerk will not only follow the company policy with regard to paying invoices, but will notice inconsistencies in reporting and request accurate documentation before paying someone.

The efficiency and effectiveness of the accounts payable process affects the company’s cash position, credit rating and relationships with suppliers. Invoices are generally issued with a specific term of payment, but those vary from company to company. Some require payment in 10 days, while others require payment in 30 days, and may offer a discount if paid earlier. Depending on your cash situation, it may benefit you to pay the invoices early and take advantage of the discount. Your Accounts Payable clerk can help you determine the best timing for scheduled payments.

The accuracy of your financial statements is also dependent on the accounts payable process. The Accounts Payable process should ensure the timely processing of accurate and legitimate vendor invoices, as well as the accurate recording of the transactions in the correct general ledger accounts. Since expenses are recorded when they occur, not when they are paid, accurately reporting accruals additionally affects the company’s financial statements.

Rely on your accountant to provide sound advice regarding the structure and rules related to your accounts payable process, as well as the best timing on disbursing payments to keep your company’s financial health in check.