The Accounts Payable Department (2024)

What Are Accounts Payable?

Accounts payable are a company’sshort-termliabilities. Companies that use accrual basis accounting have accounts payable, or money thecompany owes its vendors and suppliers, and accounts receivables(AR), or money it is owed by its customers.

Accounts payable are represented on the company’s balance sheet, the snapshot of acompany’sfinancial health. They are listed on the right-hand side under “currentliabilities.”Liabilities are listed according to when they are due to be paid. Accounts payable arelisted first because they typically need to be paid within 30 days.

Importance of the Accounts Payable Department

The second week in October, the Institute of Financial Operations celebrates AP RecognitionWeek. Everyone would do well to recognize that week by giving the AP clerk one of these mugs—because no business can exist without the AP function.

The accounts payabledepartment is responsible for accurately tracking what’s owed to suppliers,ensuringpayments are properly approved and processing payments. Accurate information on accountspayable is essential to producing an accurate balance sheet.

This job is also central to the business because:

• AP departments ensure good relationships with suppliers by making sure suppliers’information is accurate and up to date in the company’s systems. They make suresuppliers are paid on time and boost relationships to gain favorable payment terms anddiscounts.
• AP departments keep accurate books to ensure cash forecasts are accurate and workingcapital can be optimized.
• AP departments help prevent mistakes and fraud.

What Does the AP Department Do?

Companies track accounts payables on their chart of accounts. Depending on the size of theorganization, the responsibilities for accounts payable and accounts receivable may becombined. But at larger companies, they are separate functions. Here’s an example ofan APclerk job description:

What Is the AP Process?

The basic AP process goes like this: The AP clerk receives the invoice. The clerk manuallyenters the data and checks the invoice against the purchase orderand relevant general ledger (GL) account. The clerk routes the invoice for approval. Onceapproved, the clerk schedules payment against the invoice.

In the AP process, it’s important to understand double-entry bookkeeping and theconcept ofdebits and credits. Double-entry bookkeeping helps eliminate accountingerrors by logging every financial transaction twice: as a debit in one account and a creditin another.

For instance, say Bob’s Balloons purchases $500 in balloon inventory in August from itssupplier Balloonys, which sends the invoice in August due net 30 days in September. Thebookkeeper will create an account payable journal entry for Ballooneys and credit thataccount $500. It will debit $500 from its inventory asset account.

In general, when a company receives a bill, it credits accounts payable and debits an assetaccount (or expense) in the GL. When Bob’s Balloons pays the bill from Balloonys, itdebitsthe AP account and credits the inventory asset account.

Accounts payable are recorded on the company’s balance sheet as a summarized total ofallaccounts payable. In the balance sheet equation, Assets = Liabilities + Equity. Using theexample above, the balloons are assets, and the bill for them is a liability.

7 Ways to Organize Your Accounts Payable Department

1. Get the right documentation. Always require a purchase order for goods and services.Keep a vendor master file, a hub of all vendor information that includes W-9s and taxidentification numbers.
2. Centralize all records. Enter invoices into the system promptly if using software; abest practice is to do so the day they arrive. When processed, include a date stamp.Record all accounts payable in the journal. Keep all records in one place.
3. Reconcile accounts every day. Confirm if invoices match purchase orders. Keep track ofdisputes and resolutions.
4. Segregate duties. Accounting is one of the departments in which unwitting mistakes andoutright fraud is most likely to happen. Have different people in charge of approvingand processing payments.
5. Include electronic paymentmethods. Automated clearing house (ACH) transfers encrypt payment data to ensuresecurity and allow the company to take advantage of discounts borne of expeditedpayments.
6. Consider electronic data interchange (EDI). Paperless processes save time and ensuremore accurate invoice processing. This can also help a company take advantage ofdiscounts and favorable payment terms. Companies that adopt supplierrelationship management systems for procurement functions can automate purchaseorders and invoice receipt and approval. They can also better track and pay for inventory and servicesreceived.
7. Automate accounts payable. AP automation can save time and money while protecting yourbusiness from costly errors. AP automation can reduce days payableoutstanding (DPO) by an average 5.55 days, according to the Aberdeen Group.

How AP Automation Software Improves AP Department Efficiency

Accounts payable is the “most time-consuming, laborious and paper-intensive finance andadministrative function,” according to controllers surveyed by the Institute ofFinance andManagement.

AP automation software digitizes the entire process so that most invoices can be processedwithout manual intervention, while the AP department deals with exceptions and outliers.This saves time and makes the entire process more accurate.

In this system, invoices are scanned or emailed to a specific address and read by accountingautomation software. For instance, a software’s accounts payable management functionallowsbusinesses to manage vendor lists, track bills and payables, and make payment withoutneeding to enter detailed debits and credits. The invoice is routed for approval accordingto the rules and workflowbuilt in the system. Payment posts to the general ledger as an expense, and theamount of payment is automatically deducted from accounts payable. Invoices are stored in acentral database to ensure regulatory and tax compliance. What’s more, businesses haveareal-time picture of payables.

Automated accounts payable processes embed payment controls as simple and repeatableprocesses. AP automation designates separate roles by creating separate login credentialsand dashboards, as well as dual-factor authentication for logging in. This makes it hard toforge approvals and keeps a log of all approvals in a central location for easy auditing. APautomation matches invoices to purchase orders and flags anything that doesn’t match.

Accounting becomes more strategic to the business—and moves away from being viewedstrictlyas a cost center—when the department takes steps to ensure greater accuracy and fasterinvoice processing, while offering business insights with which to optimize payment timingand terms with suppliers.