Accounts Payable Management – Meaning, Benefits etc

Importance of Accounts Payable Management

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 undertakes the responsibility of paying the entity’s bills on time. As this will help in maintaining the so-called strong credit and long-term relationship with the vendors.
• If the payment is made to the vendor on time, the vendor will provide the continuous flow of goods and services for the proper functioning of the entity and also probable trade discounts.
• Accounts Payable management has the responsibility that the payment must be done on time to avoid overdue charges, penalty, or late fees.
• It has to make sure that all the invoices can be easily tracked and paid before the due date. The same helps in avoiding the non-payment or payment for the same bill multiple times.
• The porcess helps in maintaining the proper cash flows such as making payments only when due, by making effective and appropriate use of vendor’s credit facility etc.
• It also helps in refraining from any kind of fraud and theft in the business entity.

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.

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Objective of Accounts Payable Management

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:

• Details of the order made by the company.
• Details of the company receivable.
• And many more, such as calculations, totals, the proper unit costs, terms, etc.

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:

• To prevent making a payment to the fraudulent invoice
• Prevent making a payment to the inaccurate invoice
• And, to prevent making a payment to the vendor invoice twice.

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What is a Purchase Order?

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:

• Receiving department of a company.
• The person who prepares the purchase order.
• Accounts payable department of a company.
• Vendor.
• Person who made a request for a PO to be issued for the goods or services.

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Components of a Purchase Order

The purchase order has a

• Company name,
• Preparation Date
• Vendor name,
• PO number
• Mobile number
• Goods description,
• The quantity,
• Shipping method,
• Unit prices,
• Payment Date, etc.

In the three-way match, one copy of the purchase order will be used.

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What is a Receiving Report?

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.

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What is a Vendor Invoice?

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.

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Three-way Match Concept

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:

• Will prepare Purchase Order of the Company (POs)
• Will prepare Receiving Reports of the Company
• Will compare PO, Receiving Reports, and Invoice of the Company
• Will make payments to the vendors of the Company

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The Process of Accounts Payable Management

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:

• Bills receivable: In the case of trading of goods, the number or quantity of goods received can easily be traced by the bill or the invoice.
• Inspecting the details of the bill : Now, the details such as the vendor’s name, date, authorizations, and all other requirements raised with the vendor depending upon the purchase order will be verified.
• Revising the records for the bills received: Updation is done in the ledger accounts that are linked with the bills received. The entry is generally required to be made in the books of accounts. If accounting software is used in the organization, managerial approval is required to record some of the expense transactions. The approval from the manager depends on the value of the bill. Generally, big companies usually follow the ‘maker and checker’ concept for posting as the precaution.
• Payment made timely: The due dates are set between the company and the supplier or vendor by their mutual understanding. So the necessary documents are being prepared, and all of them are verified. Details such as -
  • The original bill,
  • Details as per cheque,
  • Vendors' bank account details,
  • purchase order/agreement,
  • Payment vouchers, etc.

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.

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Automated Accounting Management Process

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

• The cost of invoice processing,
• No of employees required and many more.
• It helps in reducing human errors and increasing the overall efficiency.

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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