Accounts Payable Process: A Short Introduction for Beginner Accountants
Accounting can be a difficult subject to grasp even for those who love numbers. There are processes to remember and balances to keep, and as an accountant, you will the main one responsible for keeping the books balanced. With all that accounting information to remember, some information can get confused or forgotten. Don’t let the accounts payable process be one of those things you get confused. Take a course in financial accounting.
An Introduction to the Accounts Payable Process
Outside of payroll, the accounts payable process involves nearly all other payments the company has to make. In order for the process to be done correctly, only accurate and authorized invoices and bills can be accepted. For each invoice, there are three specific elements it must have before it can be entered into the accounting records and scheduled for repayment. These three items are listed below:
- details regarding what was ordered
- what has been received so far
- the cost per unit, calculations for tax and interest, the total, and any terms applicable
Internal controls help keep the accounts payable process running smoothly by ensuring the business isn’t paying on fake invoices, isn’t paying on a faulty invoice, doesn’t pay a vendor more times than necessary, and that all invoices are on hand. Without an accurate and organized accounts payable process, a company might file incorrect financial statements, and this can cause issues down the line that no company wants to face. Understand your business better by taking an accounting course.
If vendor invoices aren’t input into the process within a timely manner, the liability won’t be on the balance sheet, and the expense won’t show on the income statement. If an invoice is recorded twice, the liabilities will exaggerated, and the expense will also be exaggerated. Without a well-working accounts payable process, users of company financial statements will have faulty feedback regarding the company’s performance and financial position.
Just like paying off your credit cards early can save you money, a company can also save money by paying off some of their bills early. However, if accounts payable are being recorded improperly, invoices could be missed when payment comes due, and relationships with suppliers can crumble. Companies that strain relationships with their supplies end up with vendors that demand cash on delivery, and a company just starting out probably doesn’t have a lot of cash on hand.
On the other side of the coin, however, it’s important that accounts not be paid too early. If one vendor is paid off completely, there might not be enough to pay the balance due on another accounts payable vendor. Accounting works on a lot of checking and balancing, and that’s why it’s important that proper records be kept. There are three documents involved when working with the accounts payable process.
The Three Documents of the Accounts Payable Process
The Purchase Order
When a company needs to order something from a vendor, they prepare a purchase order or PO. These purchase orders are usually multi-copy forms, and copies are given to a number of different people or departments including:
- the person requesting the purchase order
- the accounts payable department (or accountant)
- the receiving department (or accountant)
- the vendor
- the person preparing the purchase order
This particular form usually has a PO number, a date, the company’s name, the vendor’s name, a name and phone number for a contact person, a short description of items purchased, the quantity, the price per unit, the method of shipping, the date when the items are needed, and any other information that could prove to be important for the order. The purchase order is kept to perform a three-way match later on.
The Receiving Report
After an order has been submitted, the vendor has to send the promised units to the company. When the company receives these units, a receiving report is created. There are paper receiving reports and computerized receiving reports. The quantity and description should be matched to the purchase order to check that the correct units were sent and that the appropriate quantity was received.
Both the purchase order and the receiving report are retained by the proper accounting departments to be compared to the third document of the accounts payable process – the vendor invoice. This is done with the three-way match mentioned earlier. Learn the basic concepts of accounting with a class for technocrats.
The Vendor Invoice
Once the units have been sent to the company, the vendor will then send out a invoice or bill. Accounts payable takes these vendor invoices to process them. Once the invoice has been confirmed and allowed, the amount on the invoice is credited to the Accounts Payable account, and the same amount is debited from another account as an expense or asset. Like the other two documents listed above, the vendor invoice is kept to complete the three-way match.
The Three-Way Match of the Accounts Payable Process
Accountants use a special technique called the three-way match to confirm the accuracy of vendor invoices when completing the accounts payable process. This involves taking the purchase order, the receiving report, and the vendor invoice to compare them to each other. The purchase order, as explained above, shows what was ordered and how much it cost. The receiving report shows what the company has received. The vendor invoice shows how much the company was billed for by the vendor.
If the three documents match up, the vendor’s invoice is recorded in the Accounts Payable account, and a payment is scheduled to be sent to the vendor. To further enhance the internal control of company resources, many large companies assign these particular tasks to different employees. One employee will handle the preparation of purchase orders, another prepares receiving reports, a third completes the three-way match, and a fourth person will be in charge of paying vendors. When separating the duties of the accounts payable process in this fashion, companies have a lower chance of money being stolen.
This article is just the summary of the accounts payable process. There are many other optional documents that can be included in this process, and there are exceptions to the process. However, you will learn those as your accounting classes continue. Feel free to use this short introduction to brush up on the accounts payable process or as a short study guide.
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