Accounts Payable

Definition

An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable entry is found on a balance sheet under the heading current liabilities.

Accounts payable is an account that contains money that a person or company owes to suppliers, but has not paid yet (a form of debt).

When you receive an invoice you add it to the account, and then you remove it when you pay. Thus, the A/P is a form of credit that suppliers offer to their purchasers by allowing them to pay for a product or service after it has already been received.

Accounts Payable Overview

An accounts payable department has many responsibilities to fulfill to ensure that payments to suppliers are made on time and the needs for flexibility in the organization are met:

Managing Supplier Relationships

The accounts payable department is responsible for creating and maintaining a partnership with each supplier to ensure that all terms and conditions of the relationship are met.

Processing Invoices

The accounts payable department receives invoices and records liabilities and corresponding expenses or assets. Often, the accounts payable departmentwill have to match vouchers with invoices and purchase orders from other departments such as purchasing.

Processing Payments

The accounts payable department ensures that payments are made in the most timely, accurate, and efficient manner possible. Before paying its suppliers, the accounts payable department needs to consider several factors, such as the due date of the invoice, whether a discount can be taken, and the amount of cash on hand versus the amount due to suppliers.

Integrate ERP Systems.

Enterprise Resource Planning (ERP) automates the purchasing and payables functions, which allows a company to get more work done with fewer personnel. Also, electronic invoice matching applications save time in retrieving paperwork. It is estimated that an ERP system can annually save an organization $300 per million in sales.

Increase Payment Terms.

Negotiate payment terms based on receipt of goods or the invoice. This can add one week or more to your terms, which can be 25% of 30 day terms. Use EFT for just-in-time payments to maximize your payables terms and minimizing the impact to your credit.

Take Payment Discounts.

If you are getting 2%/10 net 30 terms, then consider taking it. This means you are offered a 2% discount if you pay within 10 days, instead of the normal 30 day terms. This translates into an 18% return on your capital, and for many organizations this is a good return on your investment.

Review Purchases.

Purchasing is a continuous process that requires continuous review. Consider: transportation charges, expedited fees, odd lot penalties, new pricing, new products, consolidating vendors, new vendors or buying groups, payment terms, and more. Communicate with your suppliers to improve the process. And review and monitor everything to account for changes in your environment.

Communicate with Suppliers.

Communicate with your suppliers to improve the process. Ask suppliers to submit their invoices electronically. This will save you time, resources and losses due to waste.

Eliminate Disputes.

Disputes with your suppliers are typically the result of a problem with your purchasing/receiving process. When disputes occur, review your purchasing procedures to ensure that they are producing the correct metrics and that you are not forced to pay for your mistakes.

Reduce Errors.

Overpayments, payments made to the wrong vendors, fake invoices, or even late payments represent a common problem for payables. Increasing your focus on error control, along with written procedures and audits, can reduce these errors considerably.