Accounts Payable Management – Meaning, Benefits etc
(Last Updated On: May 24, 2019)
Accounts payable management is one of the important business processes that help in managing 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 over 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.
Important 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 must be completed with high accuracy and the unpaid balances must be recorded with high accuracy and efficiency. In case if 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 the big figures are involved. Hence, it is very important to record the various expenses in the proper manner and also track their payment details.
Objective of Accounts Payable Management
Irrespective of the size of the company, the objective of accounts payable management is to make payment only to all those 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 proceed 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.
What is a Purchase order?
A purchase order or PO is the document made by a company to convey its requirements and document 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 recieve a PO copy are:
- Receiving department of a company.
- Person who prepares the purchase order.
- Accounts payable department of a company.
- Person who made a request for a PO to be issued for the goods or services.
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.
What is 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.
What is Vendor Invoice?
It is the invoice sent by the supplier or vendor to the company that had received the goods or services on 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.
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:
- A : Will prepare Purchase Order of the Company (POs)
- B : Will prepare Receiving Reports of the Company
- C : Will compare PO, Receiving Reports and Invoice of the Company
- D : Will make payments to the vendors of the Company
The Process of Accounts Payable Management
Every organisation have the accounts payable department and its composition depends upon how big is the organisation. Accounts payable section structure depends upon the approximate number of vendors and service providers. The no of payments transaction that would take place in the particular interval of time and the kind of the report demanded by the organisation like a small organisation having small no of number of purchase transactions would have been required only a basic accounts payable process.
On the other hand, accounts payable department of a medium or big organisation has some of the official’s guidelines. These set of rules needs to be followed before making payments to the vendor because of the value and no of payment transaction during any period of time. The process involves:
In the case of trading of goods, the number or quantity of goods received can easily be traced by the bill or the invoice. The validity of the bill time can easily be known if the bill is received on time.
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 depend 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. In this expense, entry is generally required to be made in the books of accounts. If accounting software is used in the organisation, managerial approval is required to record some of the expenses transaction.The manager gives the approval depends upon the on the value of the bill. Generally, big companies usually follow the ‘maker and checker’ concept for posting as the precaution step.
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 signature of the authorized person is the 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.
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 reduce human errors and increase the overall efficiency.
Many accounting software is available in the market which can smoothen 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. Now a days integrated management is usually integrated with the organizations ERP.
Q:What do you mean by non PO invoice?
A: 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.
Q:Is a PO and invoice is same or not?
A:The PO is prepared by the buyer, whereas invoice is prepared by the seller in order to request for the payment .
Q:What do you mean by invoice processing in accounts payable?
A:Invoice processing means to handle the incoming invoices from arrival up to post. The department that manage the invoices is known as accounts payable department.
Q:Is a PO legally binding document or not?
A:Yes, it is a legally binding document. When a seller accepts a purchase order, a legally binding contract is formed between both of them.