Accounts Payable (AP) is a sub-ledger entry that represents the amount owed by a business to its vendors/suppliers for the goods and services received. Account payable are recorded in balance sheets (sub-ledger) under business liabilities and maintained by the corporate accounts division and department. Once the due payments are debited and approved the corresponding entries are transferred to the principal ledger.
Understanding the Accounts Payable Process
AP are debt liabilities due to a vendor/supplier for goods and services purchased on credit. The process ensures transparency in dealings and requires the debits to be paid off within a given period to avoid payments defaults, overdue, penalties and duplicate payments. AP is primarily a short term debt that needs to be paid within a specific period of time as per the conditions agreed upon.
Thus accounts payable is a structured credit based system that vendors/suppliers advance to potential customers and businesses allowing them to pay for a product or service after it has been received.
The AP departments main responsibility is to review transactions and ensure that outstanding invoices are approved, processed and paid. Large organizations extensively depend upon accounts payable (AP) to reduce operational costs and improve corporate accounting efficiency.
Accounts Payable Process: The Three Way Match
In most corporate entities the accounts payable division is structured depending upon the size of the business and the volume of transactions required to be processed. Most organizations sets up a centralized AP and have general procedures and guidelines in place that needs to be followed by the corresponding divisions to avoid any errors or irregularities.
- The accounts payable process initiates when invoice (bill) is received. The received bills are recorded as entries in the liabilities sub-ledger. The invoices are then subjected for approval to the appropriate authority.
- On approval, the latter is further objected for scrutiny to revalidate vendor/supplier details, due date, authorizations, and requirements if any raised before placing or after receiving the order and services.
- Upon verification, the payments are processed to the vendor/supplier before the due date to avoid any payments defaults, overdue or penalties. The corresponding entries are then transferred from the company's liabilities sub-ledger to principal ledger concluding that the respective dues have been cleared.
For a company’s financial statements to be absolute, the AP ledgers are maintained unconditionally with accuracy. Accounts payable process ensures transparency in dealing and is crucial for the proper functioning of every corporate entity.
Accounts Payable Automation
Account payable automation minimizes the risks involved with human errors, saves time spent on data entry, costs of invoice processing and increase overall business efficiency and stability. Automation eliminates potential compliance disputes that may arise in the course and nature of business dealings and help simplify and resolve audits related complications.
Businesses adapting to automated AP systems experiences significant benefits in vendor transparency, communication, cost reduction through discounts, reduced processing time and default payment reimbursements. With automation based on strict defined protocols, the accounts payable process is limited to minimal input from beginning to end.
Accounts Payable vs. Accounts Receivable
Accounts receivable are the net amount owed to a company by its customers, while accounts payable are the amounts that a company owes to its suppliers. Accounts receivables are a measure of a company's ability to cover short-term obligations (liquidity) without additional cash flows. Accounts receivable stands as current asset whereas accounts payable is classified as current liability.