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Accounts payable management is one of the business processes that help in managing accounts payable obligations of the entity in the most effective manner. Accounts payable is the amount that the entity has to pay to its suppliers or vendors on the account of goods and services received. It means that after giving orders of goods and services by the entity, the firm should record a liability in its books of accounts on the basis of the invoice amount before making the payment. So, this liability of the entity towards its supplier or vendor is known as accounts payable. After the payment has been made to the vendor or the supplier, the amount is deducted from the accounts payable balance. This article will help you understand accounts payable meaning, benefits and process.
Accounts payable management is an essential tool for the proper functioning of the business entity. Let us take note of some common supporting reasons -
It is important for an entity to make sure that all its financial statements are completed with high accuracy, and the unpaid balances must be recorded with high accuracy and efficiency. In case expense entry is done twice or unpaid transactions are not recorded, it will lead to the incorrect financial statements recorded in the book. Because as a result of these incorrect amounts, huge losses might be caused when big figures are involved. Hence, it is very important to record the various expenses in the proper manner and also track their payment details.
Irrespective of the size of the company, the objective of accounts payable management is to make payment for the company’s bills as well as invoices that are accurate and legitimate. This means that before making the entry of the vendor’s invoice into the accounting records and proceeding for the payment, the invoice must show these details:
To protect the cash and other assets of a company, internal controls are taken care of by the accounts payable process due to the following few reasons:
A purchase order or PO is a document made by a company to convey its requirements and documents precisely to the vendor. The paper format of a PO is a multi-copy form with copies distributed to many people. Those people or departments who receive a PO copy are:
The purchase order has a
In the three-way match, one copy of the purchase order will be used.
A receiving report is a document that shows the details of the goods received by the company. It may be in paper format or it may be a computer entry. The description and quantity of the goods mentioned on the receiving report are compared with the details specified on the company’s purchase order.
After the purchase order and receiving report details are matched, it is compared with the vendor invoice. Hence, the receiving report is one of the documents used in the three-way match.
It is the invoice sent by the supplier or vendor to the company receiving the goods or services on a credit basis. After receiving the invoice, the customer will refer to it as a vendor invoice. Every vendor invoice is directed to accounts payable for further processing. After the verification and approval, the specific amount will be credited to the company’s Accounts Payable account. Simultaneously another account is debited with the same amount.
The accounts payable management, many times uses a technique known as the three-way match concept that is used to make sure that only the accurate and valid vendor invoices are recorded in the book of accounts. Also, it ensures that the payment is made for these accounts only. The three-way match involves the following:
Every organization has an accounts payable department. The size and composition of this department depend on how big the organization is. The accounts payable section structure depends upon the approximate number of vendors and service providers. The number of payment transactions that would take place in a particular interval of time is a function of the accounts payable process. For example, a small organization will have a smaller number of purchase transactions, while a large organization will have a greater number of purchase transactions. The accounts payable process helps keep a record of all these transactions and ensures that the payments are made on time. The accounts payable department of big organizations also follow a set of guidelines before making payment to the vendor.
The process involves the following components:
are inspected. Sometimes, for further processing, the signature of the authorized person is a must.
After completing the payment to the vendors or suppliers or creditors, ledger account has to be closed in the books of accounts. It further helps in reducing the liability of the company. In other words, the overall payable amount will be reduced which will result in an overall reduction in the liability of the firm.
As the accounts payable process is very important in every organization. For its smooth functioning and implementation normally, a lot of time is required to be invested. In order to have efficient accounts, automation in the payable process reduces the time significantly. It will also reduce
Many accounting software are available in the market which can improve the accounts payable process. This also reduces the use of paper in the accounting process. Normally, electronic invoices, email approvals, scanned copies of reports, etc., reduce the time required in managing the payables as well as improve the operational efficiency of the businesses. Nowadays, integrated management is usually integrated with the organization’s ERP.
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It is an online tool used for making a payment to a supplier when a purchasing order is not required, and also invoice is under the Direct Buy Limit.
The PO is prepared by the buyer, whereas invoice is prepared by the seller in order to request for the payment .
Invoice processing means to handle the incoming invoices from arrival up to post. The department that manages the invoices is known as accounts payable department.
Yes, it is a legally binding document. When a seller accepts a purchase order, a legally binding contract is formed between both of them.
