Everything you need to know about accounts payable
Whether you’re an accountant, a small business owner, or a professional working within an organization, understanding what accounts payable is and how it works is essential.
As an important cash flow indicator, accounts payable is a sign of the health of a business. To ensure consistent and accurate financial information, a dependable accounts payable process is vital. Properly managing accounts payable is also important in maintaining good business relationships with vendors and suppliers.
To boost accuracy and efficiency, many forward-looking businesses are implementing solutions that automate accounts payable. A streamlined accounts payable process enables visibility into a company’s financial wellbeing and can unlock insights that help businesses grow.
So, let’s start with the basics.
What is accounts payable?
The term accounts payable refers to all business expenses except payroll. It includes all of the bills a company owes to vendors and suppliers for goods and services provided to the business before they are paid.
Because accounts payable entries are not immediately paid, they are listed as a current liability on a business’ general ledger and balance sheet. Once they are paid, the items are removed from the balance sheet.
Often, accounts payable is abbreviated as “AP” or “A/P”. In a large organization, accounts payable may also refer to a business department responsible for organizing and paying vendors and suppliers.
It’s important to note that accounts payable does not include payroll accounting (i.e., employee compensation, payroll taxes, benefit withholdings, benefit payments, etc.).
From an accountant’s perspective, helping to manage the financial health of a business, including accounts payable, is just one of the many ways to support your business clients.
What are examples of accounts payable?
Examples of accounts payable include expenses related to goods and services purchased by the business. Think equipment purchases, cleaning services, staff uniforms, software subscriptions, office supplies, and much more.
How are accounts payable charged and paid?
Often, these types of charges are invoiced. If a business uses a credit card, the purchase will be recorded in accounts payable until it is paid off. Purchasing goods and services on credit instead of upfront payments enables a business to benefit from new assets while earning interest on the funds retained in their account.
Typically, businesses pay invoices as close to their due date as possible. This is because retaining funds longer improves cash flow. That said, it might make sense to pay invoices early if your supplier or vendor offers discounts for early payment.
What are the main functions of accounts payable?
If you are an accounts payable professional, your primary tasks revolve around tracking all cash flow and payments to vendors and suppliers. This includes creating, managing, and producing financial records. This is a critical role as accurate financial records are vital to the health of any business.
The accounts payable process is primarily made up of four actions.
- Purchasing the order
- Receiving the order
- Paying the invoice
- Resolving the accounting records
When it comes to resolving accounting records, the general ledger must be reconciled by correctly recording each transaction and comparing source documents (like statements, checks, and invoices) with accounting records. Thanks to the advent of accounting software, this process is much easier than it was in the past.
With a transparent and reliable accounts payable workflow process, businesses can ensure finances are properly managed and relationships with vendors and suppliers are maintained.
What is the difference between accounts receivable and accounts payable?
Accounts payable and accounts receivable are both important indicators of cash flow and business health.
While accounts payable ensures your business is up to date on payments and allows you to accurately project cash flow, accounts receivable is the money owed to your business by customers or clients. Until the balance is paid, the outstanding amount is recorded under accounts receivable.
How to calculate accounts payable
Excluding payroll, accounts payable includes all outstanding expenses your business owes for goods purchased and services received. Because accounts payable expenses are not immediately paid, they are considered liabilities in your accounting records.
The accounts payable turnover ratio measures how many times your business pays its creditors over an accounting period. To calculate the accounts payable turnover ratio, you divide net credit purchases by average accounts payable.
The accounts payable turnover ratio measures your business’ short-term liquidity. As such, a higher accounts payable turnover ratio is more advantageous.
Let’s say XYZ Tire Company wants to calculate their accounts payable turnover ratio for the past year. At the beginning of the period, the accounts payable balance was $700,000, and the ending balance was $784,000. Purchases for the last 12 months were $6,500,000. As such, the accounts payable turnover is calculated as:
$6,500,000 in purchases ÷ (($700,000 in beginning payables + $784,000 in ending payables) / 2)
which equates to:
$6,500,000 in purchases ÷ 742,000 in average accounts payable = 8.8 accounts payable turnover ratio
So, the company’s accounts payable turned over 8.8 times during the past year.
It is important to note that in some cases, the cost of goods sold (COGS) is used in place of net credit purchases.
How to forecast accounts payable
In an increasingly competitive marketplace, the ability to accurately forecast accounts payable can help businesses gain control over cash flow, ensure strong relationships with vendors and suppliers, and make smarter business decisions.
The accounts payable forecasting process uses historical data that measures how successful a business was in managing costs. The more accurate the data, the better the forecast.
Using our example above, if XYZ Tire Company wanted to calculate the average number of days that a payable remains unpaid, they would divide the 8.8 turns into 365 days, which equals:
365 days ÷ 8.8 turns = 41 days
This means that XYZ Tire Company takes an average of 41 days to pay its invoices.
Forecasting accounts payable helps businesses to:
- Plan better for future payments. By making sure that funds are available when bills are due, you can avoid late payment charges, overdraft fees, and negative impacts on supplier relationships.
- Avoid supply issues. By understanding how much your business spends on supplies and inventory, you can avoid business disruption.
- Benchmark data. By analyzing historical data and identifying trends, you can sort out which variables have an impact and use them to better forecast future cash flows.
It’s important to note that an automated accounts payable tool can help collect and analyze data faster and more accurately than traditional manual processes. By automating accounts payable forecasting, businesses can avoid disruptions to cash flow, better manage costs, and increase profitability.
How to reconcile accounts payable
At the end of each reporting period, accountants verify that the total of all accounts payable outstanding matches the payables account balance stated in the general ledger. This ensures that the total of accounts payable reported on the balance sheet is accurate.
The process is called accounts payable reconciliation and is outlined in the steps below.
- Bank reconciliation. To ensure your general ledger is accurate, your business should perform a bank reconciliation once per month for all bank accounts with activity. To avoid manual work, use accounting software for automatic bank reconciliation. If you use accounting software, bank reconciliation occurs automatically.
- Journal entries. Review the entries made on the bank reconciliation form to determine if you need to complete a journal entry. Any adjustments on the general ledger side will have to be entered. If you use accounting software, the general ledger is automatically reconciled to sub-ledger accounts.
- Trial balance. If your business processes many transactions, reviewing a comparative trial balance can unlock insights into your financial data that you may have otherwise missed. If something appears out of place, review the originating documents to verify accuracy. This is an important step in ensuring business health.
How accountants can help clients reconcile accounts payable
Over the years, accounting software has dramatically reduced the amount of time it takes to journalize and process accounting information. Today’s applications aren’t just streamlining the process of reconciling accounts payable—they’re redefining it by removing barriers between different types of information and allowing accountants to divide work in new ways.
Some of these features include:
- Multi-staff flexibility. Multiple staff members can work on the same client concurrently, greatly improving speed and efficiency, especially at busy times of the year.
- Dashboard-based environments. Keep close track of projects as they progress through your firm and keep detailed client notes.
- Automatic posting, journal entries and updates. Automation ensures that data entered in one part of the software is instantly shared in other areas, and safeguards automatically detect and report errors at every stage of the process.
- Customizable security features. Choose which staff members can access certain information to maintain tighter control over the process and prevent costly errors.
- Sophisticated trial balance capabilities. Easily customize the presentation of data, retain multiple balance/basis types and more.
- Flexible chart of accounts. Firm-wide templates should easily help you get new clients up and running quickly. Some systems can also streamline reordering and other modifications—allowing you to modify a large amount of data in just a few steps—and then carry those modifications through to several different balance types. This can be a big time saver as tax laws and client businesses change over the years.
Accountants should expect easy ways to modify the chart of accounts as the client’s business expands or laws change reporting standards. Software should allow easy reordering, modification and all related transactions to automatically be updated with the push of a button.
In addition, verify that journal entries have a method or ability to control which balance set is being adjusted (i.e. adjusted, report, budget or tax bases). Many systems are limited in control of how special types of journal entries impact the various balance definitions tracked. Be confident that the software’s ability to retain several sets of balances, basis and budgeting amounts meets your client’s needs—and your firm’s audit trial standards.
Features to look for to help your staff review and make adjustments:
- Templates for recurring journal entries
- Automatic calculations
- Posting period security and control
- Customizable data entry fields
- Support for dual monitors
- Flexible handling of account structure and account numbers, with alphanumeric characters and the ability to track locations and departments
- Quick and user-friendly spreadsheet imports
- The ability to export to a range of tax preparation applications
- A variety of split screen and drill-down views for troubleshooting and adjusting balances
How long should accountants keep accounts payable records?
It is recommended that accountants and businesses keep ledgers and financial documents, including accounts payable, for at least seven years.
Because many businesses and accounting firms use professional accounting software that houses this type of documentation digitally, it is much easier to search for and retain access to accounts payable, accounts receivable, financial data, profit and loss statements, and much more.
How to audit accounts payable
From the auditor’s perspective, there are three primary steps to auditing accounts payable:
- Obtain a list of all vendor invoices from the client and review them for accuracy and completeness.
- Test whether or not vendors were paid promptly.
- Issue a report detailing findings and recommendations.
Today’s auditors are less likely to be sorting through massive amounts of information manually and more likely to leverage innovative ideas and cutting-edge technology that allows them to spend more time navigating client relationships.
Technology has an enormous impact on the profession. Thanks to new tools and resources, auditors are able to work smarter and more effectively — with each other and with clients.
Accounting and auditing software can help accountants serve their client’s accounting, bookkeeping, and financial needs with maximum efficiency, whether it’s financial statement compilation or audit management.
To streamline these tasks, audit automation solutions enable accountants to confidently manage and complete audits faster with intuitive workflows and cloud-based solutions.
Can accounts payable be automated?
Yes. Software that automates the accounts payable process makes it easy for businesses to submit invoices and process payments through a single platform—all of which saves time and money.
By automating the accounts payable process, businesses can eliminate tedious data entry and paper-based processes, streamline operations, boost accuracy, and unlock insight into critical financial processes. Accounts payable automation also generates an audit trail that can save significant time in the event of an audit.
For accountants who serve business clients, professional accounting software enables you to provide your clients with accounting, bookkeeping, and financial support—with maximum efficiency. Look for a solution that pulls data directly from your clients’ spreadsheets or QuickBooks® and integrate transactions with their financial institution. You can use software to customize reports based on your clients’ needs, while also maintaining standardized reporting and financial statement formatting.
With the right tools and technology, you and your clients can:
- Reduce or eliminate manual data entry
- Confidently take on new business
- Standardize firm data and maintain consistency of financial statements across all clients
- Access real-time financial transactions and reporting to make informed business decisions
How does accounts payable automation work?
Accounts payable automation automatically finds and verifies financial information and integrates it with other applications automatically, so you spend less time searching for and entering data. This makes tracking and retrieving accounts payable details easy.
With the ability to filter accounts payable by fields like invoice amount, issue date, and more, you can gain full visibility into your financial data and prevent fraud. Plus, cloud-based accounting software lets you work securely in real time and collaborate from anywhere.
From an accountant’s point of view, your hands are often full with the day-to-day work that keeps your practice running. That doesn’t leave much time for building new business or offering more high-value services. To take a more strategic approach, it might make sense to turn to a technology to streamline your operations.
Professional accounting software for accountants combines write-up, trial balance, payroll, financial statement analysis, and more. It’s designed for professional accountants who serve multiple clients, allowing flexibility to handle all types of industry and entity types.
With the latest technology, an intelligent interface automatically finds and verifies financial information and integrates with other applications automatically, so you spend less time searching for and entering data. Cloud-based accounting lets you work securely with others in real time from anywhere.
From an accountant’s perspective, accounts payable automation enables your firm to:
- Pull data directly from your clients’ spreadsheets or QuickBooks® and integrate transactions with their financial institution.
- Work with different entity types, reporting periods, and locational and departmental clients.
- Process multiple clients at once and have multiple users within your firm working within a single client project at the same time.
- Set up controls so you choose how much information your clients can see. Plus, monitor activity by date, time, and staff member.
- Customize reports based on client needs, while also maintaining standardized reporting and financial statement formatting.
- Collaborate with your clients in real time, using this shared online portal to handle their bookkeeping and payroll tasks.
Automating accounts payable for better business insights
There is no doubt that small businesses, professionals, and accountants have more resources at their disposal than ever before to take charge of their finances. Automating the accounts payable process is a decision that offers critical financial insights and peace of mind.
When invoices are processed effectively and bills are paid on time, businesses can save significant time and money. This extra time can then be channeled into more value-added activities.
In addition, insight into the accounts payable process can improve forecasting, prevent fraud, and increase visibility. This enables accountants and professionals to make better business decisions that boost profitability.
Why savvy accountants choose Accounting CS
Accountants work hard to deliver accurate financial data and insightful services that keep clients in compliance. With client expectations higher than ever, you need faster, more meaningful insights and responsive service that demonstrates a comprehensive and strategic knowledge of their operations.
Accounting CS, a professional accounting software for accountants, combines write-up, trial balance, payroll, financial statement analysis, and more. It’s designed for professional accountants who serve multiple clients, allowing flexibility to handle all types of industry and entity types.
You can use Accounting CS Client Access to offer a completely new way to work with your business clients in real time, so you can provide more timely responses and consultative advice. This real-time collaboration eliminates version conflicts, software updates, security loopholes, imports, exports, and other inefficiencies.
Savvy accountants are using Accounting CS to:
- Strengthen client relationships. By customizing templates, reports, and critical information to your clients’ needs, sharing data, and populating changes, you’ll continually reinforce your expertise — and reaffirm your position as a trusted advisor in your clients’ eyes.
- Use relevant accounting tools and technology to anticipate clients’ needs. By eliminating inefficient paper processes, ensuring the security and accuracy of your clients’ data, and offering real-time access to financial information, you’ll enable your clients’ business to not only survive, but thrive.
- Become your clients’ go-to advisor: By eliminating the need to investigate and fix client mistakes, you’ll be in the driver’s seat and able to dedicate more time and resources to what today’s clients need most — help growing their businesses.
With the cloud-based accounting software, you can work right alongside your clients in the same secure, real-time database, making their data instantaneously available — without version conflicts, software updates, security loopholes, imports, exports, and other inefficiencies. And with built-in client check writing, client payroll, accounts payable, and accounts receivable capabilities, you’ll make it easier for clients to keep doing business with your firm.
Pair all this with a customizable report designer, and you’ll be able to confidently provide your clients with the timely, accurate, and relevant data and advice they need to make smarter business decisions. Add it up, and you’ll be uniquely positioned to offer your clients creative plans for realizing a positive, profitable future.
If you’re an accountant interested in offering your clients a completely new way to work with your firm, look no further than Accounting CS. With real-time collaboration that boosts efficiency, you can provide accounts payable support and so much more.
To learn more, visit the Accounting CS contact page. For additional information about accounts payable, read Understanding accounts payable: FAQ.
