Introduction To Understanding Accounts Payable (AP)

All businesses or organizations have two indispensable financial flows: Expenses and Revenue. The expenses part is what we refer to as accounts payable (AP).

Let’s have a quick understanding of the mentioned terms. In simple words, revenue refers to the money coming in, and expenses refer to the money going out. 

The money coming in (revenue) is responsible for meeting the requirements and helping to run the business. Once the money is in, the organization requires a department to track all expenses and keep minimal costs. Now, to manage all the mentioned jobs, accounts payable (AP) come into action.

Let’s have a deep understanding of Accounts Payable (AP).

 

 

What are Accounts Payable (AP)?

(source: Investopedia)

 

Accounts payable (AP) is an account that represents the company’s responsibility to pay off short-term debts to its creditors.

In simple terms, when a company buys goods on credit that need to be paid back in a certain period, it is known as Accounts Payable. A company’s total Accounts Payable comes under the head’s current liabilities. Accounts Payable is a short-term payable debt that needs to be paid to avoid default. In a company, the AP department is responsible for making the payments owed by the company to the suppliers or creditors.

This article includes:

• Understanding Accounts Payable (AP)
• What is the Role of Accounts Payable (AP)?
• What is the Accounts Payable Process (AP)?

 

Understanding Accounts Payable (AP)

Accounts Payable (AP) is a liability due to the vendors/ creditors when they order services without paying in cash beforehand, which means goods have been bought on credit. The term Accounts Payable (AP) is not only limited to large organizations, even at some point individuals like you and me are also accounts payable.

For instance, we consume electricity, telephone, and TV networks, and the bill is generated at the end of the month. This means that the service provider gave you some services and now the bill has to be paid to avoid default.

 

Now let us understand this from the Company’s perspective. Assume you are Company A who has bought goods from Company B on credit. The amount generated must be paid in 30 days.

In the records of Company B, the sales will be mentioned as accounts receivable and Company A will mention the purchase as accounts payable.

 

What Are The Roles Of Accounts Payable (AP)?

By and large, the role of Accounts Payable (AP) is to contribute towards financial and administrative support to the organization. The department is responsible for paying incoming bills.

Large Companies maintain a separate department for accounts payable, while small businesses mostly tend to have combined accounts receivable and payable.

Ultimately, the roles and responsibilities of AP depend on the size of an organization. In addition to paying bills, AP executes at least three roles.

 

Vendor payments

AP organizes and maintains vendor contact information either manually or with computerized data.

Again, depending on the organization, the AP department executes the verification of the purchases after the purchase is made. This department also controls the monthly aging analysis reports that help the organization analyze how much the business owes.

 

Business Travel Expenses

Large organizations that require their staff to travel have their Accounts Payable (AP) department which helps the company to manage the travel expenses.

Travel expenses include advance airline booking, hotel reservations, lodging, and all the relevant expenses. After the business travel has occurred the Accounts Payable (AP) would then investigate settling funds distributed and the amount spent.

 

Internal payments 

Accounts Payable is responsible for the distribution of internal reimbursement payments. And have control over the distribution of sales tax exemption certificates. Accounts Payable regularly grasp the supply of sales tax exemption certificates, to ensure the purchase does not include sales tax expenses.

 

Additional Functions

This department also works to reduce costs by developing strategies to save the business money.

 

What is the Accounts Payable Process?

The Accounts Payable department has set criteria and procedures to be followed before paying the vendors. The guidelines are essential to follow.

The process involves:

• Receiving the bill: when the purchase takes place, a bill is generated which helps to trace the number of goods. This helps in the verification of the bill.
• Review bill details: In this process, the department verifies and makes sure that the bill contains the required credentials. Such as the Name of the vendor, authorization, and the requirements for the purchase order.
• Updating records after the receival of the bill: The ledger accounts require to be updated depending on the received bill.
• Making payment: The department ensures that the payments are being made on or before their due date as agreed upon with the vendor and the purchasing organization. All the bank details need to be verified again before making the payment.

To conclude, accounts payable are mentioned in the company’s balance sheet under the head of current liability. It is a short-term credit that must be paid in a certain period to the creditor or vendors. Apart from this AP also deals with internal payments, business expenses, and vendor payments.

 

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