Accounts Payable: A Step-by-Step Explanation

CA Ajay goel , 14 September 2023  

Accounts payable (AP) is a term used in accounting to describe the money a company owes to its suppliers or creditors for goods and services that have been received but not yet paid for. It represents a company's short-term liabilities on the company's balance sheet, indicating an obligation to pay in the future. When a company receives goods or services from a supplier but hasn't yet made the payment, it records this as an accounts payable entry.

For example, let's consider a small retail store. Suppose they order Rs. 1,00,000 worth of inventory from a supplier with payment terms of 30 days. When the supplier delivers the goods, the retailer receives an invoice for Rs. 1,00,000. This Rs. 1,00,000 is recorded as an accounts payable on the retailer's books. Until the payment is made, it remains as a liability.

Another scenario involves a software company hiring a consulting firm for a project. If the consulting firm completes the work and invoices the software company for Rs.5,000, the software company records this Rs.5,000 as accounts payable until they settle the invoice.

Accounts payable are crucial for tracking a company's short-term financial obligations and managing cash flow. Timely and accurate management of accounts payable ensures that a business maintains healthy relationships with its suppliers while meeting its financial responsibilities.

Accounts Payable: A Step-by-Step Explanation

Recording accounts payable (AP) in the books of accounts

Let's say your business bought office supplies worth Rs 5,000 from a supplier, and you received an invoice for it.

Journal Entry

  • Debit (Increase) Office Supplies Expense: Rs 5,000. This represents the cost of the supplies you bought. You'll need to increase this account because it's an expense
  • Credit (Increase) Accounts Payable: Rs 5,000. This represents the money you owe to the supplier. You'll need to increase this account because you owe Rs 5,000.

Top of Form

Professionals in accounts payable play a crucial role in managing a company's financial obligations to its suppliers and vendors. Their primary responsibilities involve handling the processing, recording, and payment of invoices for goods and services acquired by the organization. Here are some key roles and responsibilities of professionals in accounts payable:

  1. Invoice Processing: Accounts payable professionals are responsible for receiving, reviewing, and processing invoices from suppliers. They ensure that the invoices are accurate, authorized, and match the goods or services received. An accounts payable professional receives an invoice from a supplier for a shipment of raw materials. They check the invoice for accuracy, ensuring that the quantity and price match the purchase order and delivery receipt
  2. Vendor Management: They maintain relationships with vendors and suppliers, addressing any discrepancies or issues with invoices, payments, or deliveries. Effective communication with vendors is essential for resolving disputes and maintaining good working relationships. A vendor sends an invoice for a product that was damaged during shipping. The accounts payable professional contacts the vendor to discuss the issue and negotiate a resolution or credit note.
  3. Purchase Order Matching: Accounts payable staff often match invoices with purchase orders and delivery receipts to verify that the goods or services were received as expected before processing payments. A company places an order for office supplies, and the accounts payable clerk matches the received goods to the purchase order and invoices to verify that everything was received correctly before approving the invoice for payment.
  4. Expense Classification: They code and categorize expenses appropriately to ensure accurate financial reporting and budget tracking. Proper expense classification is crucial for financial analysis and compliance. An accounts payable specialist codes an invoice from an IT service provider to the appropriate expense account, ensuring it is accurately recorded in the company's financial statements
  5. Payment Processing: Accounts payable professionals are responsible for scheduling and executing payments to vendors. This may include issuing checks, initiating electronic transfers, or using other payment methods. Accounts payable staff initiate an electronic funds transfer to pay a supplier for a batch of invoices that have been approved for payment.
  6. Payment Approval: In larger organizations, accounts payable staff may require approval from relevant departments or managers before making payments to ensure compliance with internal policies and budget constraints. In a larger organization, an accounts payable supervisor may require department managers to review and approve invoices related to their departments before processing payments.
  7. Record Keeping: They maintain accurate and organized records of all financial transactions related to accounts payable. Proper record-keeping is essential for auditing, financial reporting, and compliance purposes. Accounts payable maintains detailed records of all invoices, payments, and communications with vendors in an organized and easily accessible manner.
  8. Reconciliation: Accounts payable professionals reconcile vendor statements with company records to ensure that all invoices are accounted for and that there are no discrepancies or outstanding payments. An accounts payable clerk reconciles the company's records with a vendor's statement, identifying any discrepancies and ensuring all invoices have been accounted for.
  9. Vendor Negotiation: They may negotiate payment terms, discounts, and credit arrangements with vendors to optimize cash flow and minimize costs for the organization. An accounts payable manager negotiates with a key supplier to extend payment terms from 30 days to 45 days, helping the company improve its cash flow.
  10. Compliance and Reporting: Accounts payable professionals ensure compliance with relevant financial regulations and reporting requirements. They may be responsible for generating reports related to accounts payable for management and regulatory purposes.
  11. Process Improvement: Continuously improving accounts payable processes to enhance efficiency, reduce errors, and streamline workflows is a crucial aspect of their role. This may involve implementing automation tools or adopting best practices.
  12. Fraud Prevention: Professionals in accounts payable are often vigilant in detecting and preventing fraudulent activities, such as invoice fraud or payment fraud, which can have significant financial repercussions for the organization.
  13. Month-End and Year-End Closing: They assist in the month-end and year-end closing processes by reconciling accounts, preparing financial statements, and ensuring that all accounts payable-related transactions are properly recorded.

These are the diverse responsibilities of professionals in accounts payable and how they contribute to efficient financial operations within an organization while ensuring compliance and accuracy in financial transactions.

Published by

CA Ajay goel
(Job at Subex Limited (Bangalore))
Category Accounts   Report

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