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What is Account Payable? Difference Between Accounts Payable & Receivable

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Account payable (AP) is an important figure in a company’s balance sheet Management. You can use AP to manipulate the company’s cash flow to some extent. For example, if management wants to increase cash reserves for a certain period, they can increase the time it takes to pay off all outstanding accounts of the business.

# What is Accounts Payable?

Accounts Payable (AP) represents the amount that a company owes to its creditors and suppliers (referred to as the current liability account). Accounts payable under current liabilities are recorded on the balance sheet. It is a short-term debt payment that needs to be paid to avoid default.

# What Is the Role of Accounts Payable?

Being a debt, account payable plays an important role in accounting. Therefore, account payable departments aimed to complete dues and often pay incoming bills and invoices. In a large business, payable employees are often responsible only for accounts payable to finance, whereas, in a small business, accounts with accounts payable & accounts receivable tasks are usually combined. Although the size of a business ultimately determines the role of account payable, in most cases it completes at least three basic functions as given below in addition to paying bills-

Internal Payment: Accounts payable often operate internally to distribute internal reimbursement payments, controlling and administering petty cash. 

Internal reimbursement expenses follow business control procedures. That requires employees to turn over manual log reports, receipts, or both reimbursement requests.

Paytm cash is mostly used for small expenses such as miscellaneous mailings, out-of-pocket office supplies, or company meetings. Account payable (AP) allows to maintain & control the supply of sales tax exemption certificates, which were issued to department managers to ensure that sales tax expenses are not included in qualifying business purchases.

Vendor Payments: Incoming invoices processing and paying the suppliers of the business is a function of accounts payable, which most people think of first. Account Payable organizes and maintains vendor contact information, payment terms, and Internal Revenue Service form W-9 manually or using a computer database.

Internal controls determine whether the Account Payable (AP)  process begins with a pre-approved purchase order or not. The seller’s payment also includes a one-month aging analysis report that tells the business owners and management team how many vendors with pending payments they currently have.

Business travel expenses: Larger businesses or businesses that require employees to travel, their Account Payable(AP) department may have to manage their travel expenses. Travel management responsibilities may include advanced airline, car rental, and hotel reservations. Depending on the control of a company, accounts payable can process requests and distribute funds to cover travel expenses. When the passenger returns, the accounts payable will be responsible for distributing the funds spent or for processing travel reimbursement requests.

Other Functions: Account Payable is many times a front-line contact between the business and vendor representatives. As a result, building and maintaining good relationships often falls to accounts payable employees. Strong relationships can benefit the business when it comes to working with vendors. For example, during a seasonal dip in sales, a good relationship might lead to relaxed credit terms.

Account Payable also has the function of reducing costs by paying attention to details that can save a business money, for example, an invoice is paid within the discount period provided by many vendors. It is also a direct line of contact between a business and its vendor representatives. The company can benefit from a strong business relationship between the two and a seller can comfortably offer loan terms.

# What Is the Accounts Payable Process?

The accounts payable department will have a set of procedures to follow before making a vendor payment. It usually begins with a request from the purchasing department or responsible personnel until payment is made to the supplier of goods or services. These steps may include the account payable process:

1. Request for Goods or Services: The first phase of goods payable usually begins with a request to purchase goods or services. At this stage, there is significant process authority that is usually required for any purchase request.

2. Buy goods or services: Usually, the purchasing department is the one who is responsible for the purchase of goods or services for the company. If there is no procurement department, the responsibility of procurement usually goes to the administration department.

3. Receive goods or services: Accounts payable after sending a purchase order to the supplier will continue when the company receives goods or services from the supplier. In this case, when the company receives the goods, the person receiving the goods coincides with the actual quantity of goods purchased and will make a report or note of the goods received and send it to the accounting department for recording. 

4. Record Accounts payable: Under a contingency basis, expenditure occurs when the company receives goods or services; Therefore, the company should file a liability here. Similarly, here the process of accounts payable is one where the accountant will file the accounts payable as a liability using purchase orders, reports, and invoices of the supplier.

5. Make Payment: After recording the liability, the due process continues when the company is required to make payments after enforcing the liability for a specified period, usually on a period closer to the due date or on the due date.

Typically, the accountant will have the responsibility to monitor the payment due date and request to pay the liability. Before making the payment, the accountant must ensure that all three supporting documents, including purchase orders, receiving reports, and invoices of the supplier, are available for verification.

6. Settle Account Payable: After paying to settle the liability, the accountant is required to record the transaction to reverse the accounts payable. At this stage of the accounts payable process, the accountant is required to check the official receipt or receipt voucher as well as the bank transfer slip or copied cheque, if the payment is made by bank transfer or cheque, supporting documents. 

# What Is Included in Accounts Payable?

Accounts payable include short-term debt owed to suppliers. It is on the balance sheet of a company as a current liability and is a collection of short-term credits extended by sellers and creditors for goods and services received by a business. An account payable department also takes care of internal payments for business expenses, travel, and petty cash.

# What is the Account Payable Turnover Ratio?

Accounts payable turnover ratio is an accounting liquidity metric that evaluates how fast a company pays its creditors (suppliers). The ratio shows how often a company pays its average accounts in a given period. The accounts payable turnover ratio measures the number of times a company pays its suppliers during a specific accounting period.

Accounts payables turnover trends can help a company to assess its cash position. Receivable ratios can be used to judge a company’s incoming cash position, this figure can demonstrate how a business handles its outgoing payments.

# 5 Tips for Successfully Managing Accounts Payable 

Here are five useful tips that can help you easily and successfully manage the payable operations of your accounts.

1. Make the Accounts Payable Process Simple: It is easy to simplify the accounts payable process by taking some simple measures, such as;

  • Reduce the number of check runs to two in a month

  • Ask concerned department heads to approve invoices and keep invoice backups ready before starting the check backup process

  • Notify the accounts payable before the cash disbursement limit (if any) so that significant bills are paid first.

  • Allow your accounts payable staff to make some non-critical payment decisions such as making partial payments or delaying payment to a vendor who may wait another month

2. Use Technology to your advantage: With the advent of technology, manual tasks with much more time-consuming payables have become simpler. By using such a technique, many tasks can be easily streamlined, such as;

  • Minimize simple errors like paying the wrong amount for an invoice or entering the wrong check number

  • Set up automatic modules for accounts payable so that all your payment transactions can go smoothly

  • Using well-configured, high-quality accounting software for managing all the accounts payable transactions

  • Run the report regularly so that you know what is in store for the next few days. There are chances that you may miss a big action item that is coming your way. You did it manually. However, technology and automation help you run checks at regular intervals and alert you to any major checks coming your way.

  • Using laser-printed checks, you can easily update your accounts payable system and identify paid and unpaid invoices, the number associated with them.

3. Dealing with accounts payable fraud:- There could be an example of fraudulent processes that can be dealt with by a company that may be owed largely to complex accounts. However, there are ways in which this can be reduced to a great extent, such as;

  • Many times, “dummy” vendors are made into a payable system. Payments are issued to fake vendors who did not provide any service to your company. To avoid this situation, make sure you set system parameters that do not enable the creation of new vendors without due diligence.

  • If all new vendors are to be created in the system, this must be done by giving complete proof of the existence of the vendor and the services provided by the vendor to your company.

  • Ensure that there are several levels of approval required to set up a new vendor in the accounts payable. This will help eliminate the possibility of fraud.

4. Seller term may be negotiable: Many times, there is a need to revisit the payment terms for your vendors. This happens when an emergency occurs and you are unable to pay your vendors on time. Therefore, please ensure the following:

  • You negotiate with your vendors and reschedule another month of payments in the future

  • If you have been working with your vendors for a long time, you build a trust factor with them, letting them know that you will be issuing your payments to ensure that, even if there are delays. Talking with them and asking for some more time helps you to ensure that your accounts payable does not get adversely affected.

5. Relook at the Role of the Chief Financial Officer (CFO): The CFO should not be expected to check the authenticity of an invoice. Therefore, keep these steps in mind;

  • CFOs are busy people who may not always have the time to gather all the checks and verify their accuracy

  • By automating the accounts payable processes to your accounts, you can reduce the CFO’s work by simply checking the invoice amount and signing to issue payments

  • The Payable team should be able to take advantage of the technology and ensure that all invoices are cleared, as well as before the checks are printed and approved by department heads for each of the invoices, the CFO’s Must be approved before being submitted. 

# Accounts Receivable vs. Accounts Payable

MeaningMoney is expected to be received by the company in the future for the goods sold and services rendered to the customers on credit.Money expected to be paid by the company in the future for the goods bought and services received from the suppliers on credit.
ConceptThe amount owed by the entity towards debtors.The amount owed by the company towards creditors.
RepresentsMoney to be collectedMoney to be paid
Outcome ofCredit SalesCredit Purchases
Results inCash inflowsCash outflows
ComponentsBills Receivable and Debtors.Bills Payable and Creditors.

Frequently Asked Questions:

# What are the examples of accounts payable? 

List of account payable examples:-

  • Purchase of raw materials / Power / Fuel

  • Transportation and Logistics charges

  • Assembling and Subcontracting Works 
  • Traveling Expenses

  • Purchase of equipment 

  • Amount of elements on lease

  • Any license registration

# Is Accounts Payable an asset?

No, Account Payable is not an asset because it is considered a current liability on the balance sheet.

# Is Accounts Payable a noncurrent asset?

Accounts payable are obligations within one year. These are long-term obligations that come after one year or more than one year. It does not intrude on the conversion cycle of goods. It comes under the current liabilities section of the balance sheet.

# Is interest payable an asset?

No, the Interest payable is not an asset. It is a liability and is usually found within the current liabilities section of the balance sheet.

# Is the loan payable current assets?

Yes, You can record a loan payable as a current asset and loan receivable as a current liability if it’s to be entirely repaid within the next year.

# Is accounts payable long term debt?

No, Account Payable is not a long term debt. Account payable is typically a short-term debt instrument. 

# Are accounts payable included in net debt? 

Yes, Account Payable is included in net debt because total debt includes long-term liabilities, such as mortgages and other debts that do not mature for many years, as well as short-term obligations, including debt payments, credit cards, and account payables.

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