Accounts payable
Encyclopedia
Accounts payable is a file or account sub-ledger that records amounts that a person or company owes to suppliers, but has not paid yet (a form of debt
), sometimes referred as trade payables. When an invoice
is received, it is added to the file, and then removed when it is paid. Thus, the A/P is a form of credit
that suppliers offer to their customers by allowing them to pay for a product or service after it has already been received.
In household
s, accounts payable are ordinarily bills from the electric company
, telephone
company, cable television
or satellite dish
service, newspaper
subscription, and other such regular services. Householders usually track and pay on a monthly basis by hand using cheque
s or credit card
s. In a business, there is usually a much broader range of services in the A/P file, and accountants or bookkeepers usually use accounting software
to track the flow of money into this liability account when they receive invoices and out of it when they make payments. Increasingly, large firms are using specialized Accounts Payable automation solutions (commonly called ePayables) to automate the paper and manual elements of processing an organization's invoices.
Commonly, a supplier will ship a product, issue an invoice, and collect payment later, which describes a cash conversion cycle
, a period of time during which the supplier has already paid for raw materials but hasn't been paid in return by the final customer.
When the invoice is received by the purchaser it is matched to the packing slip
and purchase order
, and if all is in order, the invoice is paid. This is referred to as the three-way match. The three-way match can slow down the payment process, so the method may be modified. For example, three-way matching may be limited solely to large-value invoices, or the matching is automatically approved if the received quantity is within a certain percentage of the amount authorized in the purchase order.
by accounts payable personnel. Segregation of duties is a common control. Nearly all companies have a junior employee process and print a cheque and a senior employee review and sign the cheque. Often, the accounting software will limit each employee to performing only the functions assigned to them, so that there is no way any one employee – even the controller
– can singlehandedly make a payment.
Some companies also separate the functions of adding new vendors and entering vouchers. This makes it impossible for an employee to add himself as a vendor and then cut a cheque to himself without colluding with another employee. This file is referred to as the master vendor file. It is the repository of all significant information about the company's suppliers. It is the reference point for accounts payable when it comes to paying invoices.
In addition, most companies require a second signature on cheques whose amount exceeds a specified threshold.
Accounts payable personnel must watch for fraudulent invoices. In the absence of a purchase order
system, the first line of defense is the approving manager. However, A/P staff should become familiar with a few common problems, such as "Yellow Pages
" ripoff
s in which fraudulent operators offer to place an advertisement. The walking-fingers logo has never been trademarked, and there are many different Yellow Pages-style directories, most of which have a small distribution. According to an article in the Winter 2000 American Payroll Association
's Employer Practices, "Vendors may send documents that look like invoices but in small print they state "this is not a bill." These may be charges for directory listings or advertisements. Recently, some companies have begun sending what appears to be a rebate or refund check; in reality, it is a registration for services that is activated when the document is returned with a signature."
In accounts payable, a simple mistake can cause a large overpayment. A common example involves duplicate invoices. An invoice may be temporarily misplaced or still in the approval status when the vendors calls to inquire into its payment status. After the A/P staff member looks it up and finds it has not been paid, the vendor sends a duplicate invoice; meanwhile the original invoice shows up and gets paid. Then the duplicate invoice arrives and inadvertently gets paid as well, perhaps under a slightly different invoice number.
Auditors typically prepare an ageing structure of accounts payable for a better understanding of outstanding debts over certain periods (30, 60, 90 days, etc.). Such structures are helpful in the correct presentation of the balance sheet as of year end.
The key to Accounts Payable Automation is to develop or invest in technology that will enable the company to free up labor from task the techology can perform. Examples are opening mail, scanning, entry in to the Accounting System or ERP System and filing(4).
There are three main components AP Automation.
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
), sometimes referred as trade payables. When an invoice
Invoice
An invoice or bill is a commercial document issued by a seller to the buyer, indicating the products, quantities, and agreed prices for products or services the seller has provided the buyer. An invoice indicates the buyer must pay the seller, according to the payment terms...
is received, it is added to the file, and then removed when it is paid. Thus, the A/P is a form of credit
Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
that suppliers offer to their customers by allowing them to pay for a product or service after it has already been received.
In household
Household
The household is "the basic residential unit in which economic production, consumption, inheritance, child rearing, and shelter are organized and carried out"; [the household] "may or may not be synonymous with family"....
s, accounts payable are ordinarily bills from the electric company
Electrical power industry
The electric power industry provides the production and delivery of electric energy, often known as power, or electricity, in sufficient quantities to areas that need electricity through a grid connection. The grid distributes electrical energy to customers...
, telephone
Telephone
The telephone , colloquially referred to as a phone, is a telecommunications device that transmits and receives sounds, usually the human voice. Telephones are a point-to-point communication system whose most basic function is to allow two people separated by large distances to talk to each other...
company, cable television
Cable television
Cable television is a system of providing television programs to consumers via radio frequency signals transmitted to televisions through coaxial cables or digital light pulses through fixed optical fibers located on the subscriber's property, much like the over-the-air method used in traditional...
or satellite dish
Satellite dish
A satellite dish is a dish-shaped type of parabolic antenna designed to receive microwaves from communications satellites, which transmit data transmissions or broadcasts, such as satellite television.-Principle of operation:...
service, newspaper
Newspaper
A newspaper is a scheduled publication containing news of current events, informative articles, diverse features and advertising. It usually is printed on relatively inexpensive, low-grade paper such as newsprint. By 2007, there were 6580 daily newspapers in the world selling 395 million copies a...
subscription, and other such regular services. Householders usually track and pay on a monthly basis by hand using cheque
Cheque
A cheque is a document/instrument See the negotiable cow—itself a fictional story—for discussions of cheques written on unusual surfaces. that orders a payment of money from a bank account...
s or credit card
Credit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
s. In a business, there is usually a much broader range of services in the A/P file, and accountants or bookkeepers usually use accounting software
Accounting software
Accounting software is application software that records and processes accounting transactions within functional modules such as accounts payable, accounts receivable, payroll, and trial balance. It functions as an accounting information system...
to track the flow of money into this liability account when they receive invoices and out of it when they make payments. Increasingly, large firms are using specialized Accounts Payable automation solutions (commonly called ePayables) to automate the paper and manual elements of processing an organization's invoices.
Commonly, a supplier will ship a product, issue an invoice, and collect payment later, which describes a cash conversion cycle
Cash conversion cycle
In management accounting, the Cash Conversion Cycle measures how long a firm will be deprived of cash if it increases its investment in resources in order to expand customer sales. It is thus a measure of the liquidity risk entailed by growth...
, a period of time during which the supplier has already paid for raw materials but hasn't been paid in return by the final customer.
When the invoice is received by the purchaser it is matched to the packing slip
Packing slip
A shipping list, packing list, waybill, packing slip , is a shipping document that accompanies delivery packages, usually inside an attached shipping pouch or inside the package itself...
and purchase order
Purchase order
A purchase order is a commercial document issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services the seller will provide to the buyer. Sending a purchase order to a supplier constitutes a legal offer to buy products or services...
, and if all is in order, the invoice is paid. This is referred to as the three-way match. The three-way match can slow down the payment process, so the method may be modified. For example, three-way matching may be limited solely to large-value invoices, or the matching is automatically approved if the received quantity is within a certain percentage of the amount authorized in the purchase order.
Expense administration
Expense administration is usually closely related to accounts payable, and sometimes those functions are performed by the same employee. The expense administrator verifies employees' expense reports, confirming that receipts exist to support airline, ground transport, meals and entertainment, telephone, hotel, and other expenses. This documentation is necessary for tax purposes and to prevent reimbursement of inappropriate or erroneous expenses. Airline expenses are, perhaps, the most prone to fraud because of the high cost of air travel and the confusing nature of airline-related documentation, which can consist of an array of reservations, receipts, and actual tickets.Internal controls
A variety of checks against abuse are usually present to prevent embezzlementEmbezzlement
Embezzlement is the act of dishonestly appropriating or secreting assets by one or more individuals to whom such assets have been entrusted....
by accounts payable personnel. Segregation of duties is a common control. Nearly all companies have a junior employee process and print a cheque and a senior employee review and sign the cheque. Often, the accounting software will limit each employee to performing only the functions assigned to them, so that there is no way any one employee – even the controller
Comptroller
A comptroller is a management level position responsible for supervising the quality of accounting and financial reporting of an organization.In British government, the Comptroller General or Comptroller and Auditor General is in most countries the external auditor of the budget execution of the...
– can singlehandedly make a payment.
Some companies also separate the functions of adding new vendors and entering vouchers. This makes it impossible for an employee to add himself as a vendor and then cut a cheque to himself without colluding with another employee. This file is referred to as the master vendor file. It is the repository of all significant information about the company's suppliers. It is the reference point for accounts payable when it comes to paying invoices.
In addition, most companies require a second signature on cheques whose amount exceeds a specified threshold.
Accounts payable personnel must watch for fraudulent invoices. In the absence of a purchase order
Purchase order
A purchase order is a commercial document issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services the seller will provide to the buyer. Sending a purchase order to a supplier constitutes a legal offer to buy products or services...
system, the first line of defense is the approving manager. However, A/P staff should become familiar with a few common problems, such as "Yellow Pages
Yellow Pages
Yellow Pages refers to a telephone directory of businesses, organized by category, rather than alphabetically by business name and in which advertising is sold. As the name suggests, such directories were originally printed on yellow paper, as opposed to white pages for non-commercial listings...
" ripoff
Ripoff
A ripoff is a bad financial transaction. Usually it refers to an incident in which a person overpays for something. A ripoff is distinguished from a scam in that a scam involves wrongdoing such as fraud; whether or not something is a ripoff, on the other hand, is a matter of opinion.In a related...
s in which fraudulent operators offer to place an advertisement. The walking-fingers logo has never been trademarked, and there are many different Yellow Pages-style directories, most of which have a small distribution. According to an article in the Winter 2000 American Payroll Association
American Payroll Association
The American Payroll Association is a professional association for individuals responsible for processing company payrolls. The Association conducts payroll training courses and seminars yearly and publishes a library of payroll resource texts and newsletters...
's Employer Practices, "Vendors may send documents that look like invoices but in small print they state "this is not a bill." These may be charges for directory listings or advertisements. Recently, some companies have begun sending what appears to be a rebate or refund check; in reality, it is a registration for services that is activated when the document is returned with a signature."
In accounts payable, a simple mistake can cause a large overpayment. A common example involves duplicate invoices. An invoice may be temporarily misplaced or still in the approval status when the vendors calls to inquire into its payment status. After the A/P staff member looks it up and finds it has not been paid, the vendor sends a duplicate invoice; meanwhile the original invoice shows up and gets paid. Then the duplicate invoice arrives and inadvertently gets paid as well, perhaps under a slightly different invoice number.
Audits of accounts payable
Auditors often focus on the existence of approved invoices, expense reports, and other supporting documentation to support cheques that were cut. The presence of a confirmation or statement from the supplier is reasonable proof of the existence of the account. It is not uncommon for some of this documentation to be lost or misfiled by the time the audit rolls around. An auditor may decide to expand the sample size in such situations.Auditors typically prepare an ageing structure of accounts payable for a better understanding of outstanding debts over certain periods (30, 60, 90 days, etc.). Such structures are helpful in the correct presentation of the balance sheet as of year end.
Accounts Payable Automation
ePayables are defined as the technology or process automation solutions that automate any part of the accounts payable ("AP") process.The key to Accounts Payable Automation is to develop or invest in technology that will enable the company to free up labor from task the techology can perform. Examples are opening mail, scanning, entry in to the Accounting System or ERP System and filing(4).
There are three main components AP Automation.
- 100% Electronic Invoices
- Event Driven Workflow
- Reporting Layer to Track all Actions
Accounts Payable Requirements
- Have years of Accounts Payable experience
- High school diploma required, college courses in accounting preferred
- Must have strong work ethics
- Must be well organized and a self-starter
- Must be able to follow standard filing procedures
- Detail oriented, professional attitude, reliable
- Proficient in Excel and Word, 10-key by touch, Oracle experience a plus
- Ability to type 60-65 wpm
- Possess strong organizational and time management skills
- Strong problem solving skills, basic accounting principles knowledge, documentation skills, research and resolution skills, data analysis and multi-tasking skills
- Thorough knowledge of applicable accounts payable/general ledger systems and procedures, financial chart of accounts and corporate procedures
- Ability to communicate effectively verbally and in writing
- Ability to interact with employees and vendors in a professional manner
- Ability to speak and write English and Spanish fluently (a must)
- Ability to work independently and with a team in a fast-paced and high volume environment with emphasis on accuracy and timeliness
- Ability to perform mathematical computations such as percentages, fractions, addition, subtraction, multiplication and division quickly and accurately
See also
- Accounts receivableAccounts receivableAccounts receivable also known as Debtors, is money owed to a business by its clients and shown on its Balance Sheet as an asset...
- PayrollPayrollIn a company, payroll is the sum of all financial records of salaries for an employee, wages, bonuses and deductions. In accounting, payroll refers to the amount paid to employees for services they provided during a certain period of time. Payroll plays a major role in a company for several reasons...
- American Accounts Payable Association
- List of finance topics
- Invoice readerInvoice readerInvoice reader is a technical term that usually signifies complex software solutions for enterprise Accounts Payable departments data entry business process optimization...
- Creditor ReferenceCreditor ReferenceThe Creditor Reference is an international business standard based on ISO 11649, implemented at the end of 2008....