Businesses must pay attention to the accounts payable cycle and gain comprehensive knowledge to ensure a proper flow exit. The growth of a business depends on the well-balanced and interconnected process of accounts payable and accounts receivables.
While the accounts receivable cycle belongs to the category of revenue cycle, the accounts payable belongs to the expenditure and related purchase cycle. When businesses take care of the payables segment, they can easily make sure all payments are cleared in due time. Hence, proper accounts payable management is essential. This piece thoroughly talks about accounts payable, working procedures and the importance of the same.
Accounts Payables: A Brief Overview
Accounts payable refers to the amount of money a business entity owes to a vendor or suppliers for the purpose of availing goods or services. To be precise, when a business entity places an order for goods or services and receives the same before making any payment for it, the due amount is considered a liability. Therefore, it is documented as the same in the account books based on the invoice amount.
Accounts payable processing refers to the process that is responsible for making payment to suppliers and vendors for the availed goods and services (by any business entity). The accounts payable process ensures accuracy in every payment generated from the business. This process is only part of the P2P (process-to-pay) process that includes all operations, i.e., procurement, invoice processing, and vendor payment.
Wondering how accounts payable works for a business? Read the next section and learn the process.
Operational Method Of Accounts Payable For Business
Accounts payable works for a business by following the simple steps mentioned below:
- Create Chart Of Details
Creating a chart of accounts is essential for processing accounts payable. Chart of accounts features all accounting transaction details, including accounts payable. Usually, all accounting software applications feature default setup; hence business persons must include additional liabilities so that they can track all accounts payable without missing any payment.
- Maintain Vendor Details
Entrepreneurs must focus on setting up vendor details. This is important, regardless of where the tracking is, spreadsheet software or accounting software. Businesses using the accounting software can update vendor details right on the application and include all the vendor-provided accounting or payment terms. Some of the common payment terms include Net 10, Net 30, Net 60, 2/10 Net 30, Due on receipt, etc.
- Scrutinise Bill And Enter Details
After setting up vendor details and receiving invoices from vendors or suppliers, the next crucial step is scrutinising the bills for accuracy. For instance, for a bill of ordered products, the accountant must check the accuracy of the invoice, i.e., whether all the products mentioned have been received. Similarly, for a bill of ordered services, they must make sure all the services are provided and received as per the requirement. After completing the reviewing of the bills, accountants must focus on entering bill details in the ledger account or software application.
- Process Payment
After checking bills and updating bill details, the accountant must make payment on or before the due date. They must review due dates to avoid late payment. Businesspersons can complete payment through various mediums, such as cheques, company credit cards, or electronic payment methods (e.g. ACH). Gather all the required documents for making the payment and inform vendors of the payment mode to avoid discrepancies and confusion.
The accounts payable process works in the above-mentioned ways. Now that we know accounts payable and its operational method, let’s learn about the importance of accounts payable management.
Importance of Accounts Payable Management
Accounts payable and its management is important to:
- Boost long-term credit relationships with vendors by making timely payments.
- Ensure uninterrupted flow of business, i.e. delivery of goods and services from vendors, which are necessary for running a business.
- Avoid overdue charges, penalties, or late payment charges.
- Ensure no payments are missed or paid twice by proper tracking.
- Maintain enhanced cash flow.
- Avoid fraud and thefts through a rigid accounts payable process.
All these accounts payable related tasks, such as creating chart details, vendor details, reviewing bills, entering bill details, may seem burdensome and time-consuming for entrepreneurs. Besides, manual tracking leaves room for errors.
In such cases, they can opt for an automated accounting process available at Capvel by KredX. The automated payable process reduces human errors and increases efficiency. In addition, this online platform offers automation of all mechanical tasks, reduces inter-team dependencies, impacts AP, and provides real-time data access to all stakeholders engaged in accounts payable and numerous advantageous features for business.
Businesses must not consider the accounts payable process as only paying bills. Accounts payable is an essential and critical process to ensure seamless functioning of a business. By ensuring proper accounts payable management, entrepreneurs can eliminate late payment charges cases of fraud or theft as they will be paying exactly what they owe to vendors/suppliers, thus ensuring better cash flow.