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Accounts Payable and Your Business: What You Need to Know

Business News Daily Editor
Business News Daily Editor

Accounts payable includes all of your business's expenses except payroll. Here's how to handle this important component of your business finances.

  • Accounts payable are bills that a company needs to pay.
  • Some examples of accounts payable apply to cleaning services, staff uniforms and office supplies.
  • The three steps to accounts payable are purchasing the order, receiving the order and sending the vendor invoice.

Accounts payable are the bills and other debts that the business needs to pay. As a matter of fact, the only thing that a business pays that is not considered accounts payable is payroll. Everything else falls under the category, making it a critical aspect of your business.  

"The accuracy and completeness of a company's financial statements are dependent on the accounts payable process," said Harold Averkamp, founder and author of accounting advice website Accounting Coach. "The efficiency and effectiveness of the accounts payable process will also affect the company's cash position, credit rating and relationship with its suppliers."

Implementing a dependable accounts payable system will produce accurate financial information you need to plan for both the short and long term. Here's what you need to know about keeping up with your business debts.

Examples of accounts payable

These are some examples of accounts payable, according to Investopedia:

  • Cleaning services: One example of accounts payable is when a company hires an outside company to handle their cleaning services. In this case, the company must send regular payments to the company in exchange for prompt and reliable service.

  • Staff uniforms: Another example of accounts payable is when a company hires another company to create their uniforms. In this case, many companies have to constantly order uniforms for new employees and to replace uniforms that have been damaged or lost by existing employees.

  • Office supplies: Another prominent example of accounts payable is that of office supplies. Many companies buy office supplies in bulk and have automatic orders set up based on the frequency at which these supplies are used. Therefore, they often have pending payments to these companies to ensure efficient workflow.

  • Sanitation: Lastly, many businesses must pay to have their garbage and recyclables hauled away. These services are typically weekly. 

Tracking accounts payable

Accounts payable, sometimes abbreviated as A/P, is tracked monthly for many small businesses, but as the business grows, it is better to make it a weekly task to take advantage of early payment discounts and resolve any credits due to inventory returns. It is handy to keep a record of accounts payable in case there are any payment disputes, to remind the business of current or outstanding invoices, or as proof of spending at tax time. These records can be kept manually or with accounting software. [Read related article: Best Accounting Software for Small Business]

Working with accounts payable requires great attention to detail. Each invoice needs to be verified for accuracy, billing date and payment date, and then entered correctly in the general ledger or accounting software. Based on our research, here are some general tips to set up your accounts payable and help the process run smoothly:

  • Work from the original invoice whenever possible. Some invoices are sent electronically. With electronic invoices to avoid any mistakes, print the invoice once and then file the email away to minimize confusion.

  • Use the same entering system every time. Each vendor has its own system of invoicing but assigning the invoice number in your system should be consistent. Determine the method, such as using leading zeros, and stick to it. 

  • Enter every invoice individually. This includes multiple monthly invoices from the same supplier. In the event of a dispute, you will want to be able to track it down in your system easily. 

  • Get invoice approval from the appropriate person before entering it. The person approving the invoice should be different than the one entering it. If you are a sole proprietor and do your own bookwork, this may not be possible, but still, have a clear process for approval and entry. Keep solid records to support each one. 

  • Look for early payment discounts to save money. It can add up by the end of the year. Some vendors offer a small percentage off the invoice if you pay it within a specified time frame from the invoice date, such as within 10 days. If you typically only work with accounts payable once a month, consider a system in which you identify early payment discount opportunities when the invoice is received and pay those separately from the monthly pile. 

Cash flow is important to a small business. A solid system of monitoring and paying accounts payable gives you a clear picture of your expenditures against your revenue, enabling better business decisions.  

The accounts payable process

These are the steps of the accounts payable process, according to Untapped:

  • Purchase order: In order to initiate the process, the purchasing department of a company or organization sends the purchase order to the vendor.
  • Receiving report: From there, one the company has received the good or service, they create a receiving report, which documents the shipment including any issues, damages, etc.
  • Vendor invoice: Lastly, the invoice is sent by the vendor in order to request funds. Once accounts payable receives the invoice, they are given a certain amount of time to pay all or a portion of the costs in the case of big-ticket goods and services.

Additional resources

Further information on handling accounts payable can be found in the following articles:

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