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Accounts Payable – Definition, Process, Software & Examples

For a thriving enterprise, handling accounts payable is essential. After all, your business must fulfill its financial obligations, and even the most seemingly minor mistakes in this area can have dire consequences.

Accounts payable mitigates such problems and helps business owners build relationships, avoid bad credit, stay clear of liabilities, and maintain overall financial stability.

However, to achieve this, it is imperative first to understand what is accounts payable and how to handle the accounts payable process.Â

This article aims to provide readers with a comprehensive look into all facets surrounding the accounts payable process to help businesses understand why it must be a top priority.Â

In this dive into accounts payable, we will cover:

  • Accounts Payable Definition
  • What Is Accounts Payable
  • Accounts Payable Vs. Accounts Receivable
  • What Does Accounts Payable Do?
  • Examples Of Accounts Payable
  • What Is The Accounts Payable Process?
  • Why You Need To Automate Accounts Payable

Let’s get right into it!

Accounts Payable Definition

To begin with, accounts payable is an accounting term referring to the short-term debt and liabilities a business owes to its suppliers and vendors recorded in its balance sheet.

Simply put, accounts payable payments are obligations with payment terms stipulating repayment to the creditor within a year of purchasing the goods or services.Â

Key Takeaways

  • Accounts payable payments are obligations with payment terms stipulating repayment to the creditor within a year.
  • The accounts payable department is primarily responsible for promptly paying all short-term payments.
  • Long-term debts and liabilities with repayment periods longer than a year do not come under accounts payable.
  • The accounts payable department needs streamlined processes to ensure errors and fraud do not occur.

What is Accounts Payable?

Long-term debts and liabilities, such as mortgages and loans, with repayment periods longer than a year, are separate liabilities, not to be mistakenly included as accounts payable.Â

Payroll is another aspect that does not come under accounts payable as it is not a single account. Instead, it comprises expenses and payable accounts, including wages, salaries, taxes, and withholdings.Â

It is why payroll and accounts payable are listed separately under the liabilities section of the company’s balance sheet as wages payable and accounts payable.

Instead, accounts payable encompasses all short-term debts owed to creditors that must be settled within a year, and the sooner you do it, the better for your business. It is a crucial competency that enables companies to verify expense invoices and their corresponding purchase orders to ensure that businesses protect their cash flow and assets.

The fundamental goal of the accounts payable department is to track and manage the payables such that the business accurately and strategically pays them off.Â

Accounts Payable vs. Accounts Receivable

Accounts payable and accounts receivable are two sides of the same coin.Â

While accounts payable is paying off debts your business owes to its creditors and is considered a liability, accounts receivables represent the inbound cash owed to your business that it must collect from external sources for any products or services you provide.Â

What do Accounts Payable do?

A good accounts payable department must comprise capable team members that can perform critical accounts payable functions, have excellent attention to detail, and have the right analytical skills to identify questionable purchase orders or purchases that can be detrimental to the organization’s cash flow.Â

Let us look at some of the critical aspects of accounts payable.

Copy:

  • Vendor payments
  • Internal payments
  • Business travel expenses
  • Other payments (loan repayments, tax payments, independent contractors, freelancers, insurance premiums, rental obligations, etc.)]

1. Vendor Payments

The responsibility of obtaining, inspecting, processing, and verifying the financial data of all business transactions where a company purchases goods and services on credit falls entirely with the accounts payable department.

The accounts payable professionals must verify the accuracy of creditor invoices and ensure the purchased goods or services are paid for promptly per the mutually agreed upon terms and conditions.Â

2. Internal Payments

Internal expenses within the organization, not involving external vendors and suppliers, are part and parcel of any business. Such payments vary from small expenses, such as office supplies and food, to more significant expenses, such as office equipment purchases, operational costs, rent, and utilities. Â

Assessing the documentation and approvals for these expenses and accurately processing internal payment requests is yet another primary function of the accounts payables department.Â

3. Business Travel Expenses

Often, companies engage in business travel with multiple traveling employees. In such instances, traveling employees commonly make a high volume of transactions toward achieving business goals. Business travel expenses that the accounts payable department is also responsible for include airfare, lodging, food, and local transportation.Â

Here, the accounts payable department is responsible for processing employee reimbursements where applicable.

Before processing these reimbursements, they must assess the authenticity and adherence of each transaction to corporate travel policies. Once the accounts payable department verifies the legitimacy of such expense invoices, they process the appropriate reimbursements for those deemed as justifiable corporate expenses.

4. Other Payments

While the above are some of the most common payments that businesses and their accounts payable departments encounter, some expenses fall outside these categories, including but not limited to loan repayments, tax payments, independent contractors, freelancers, insurance premiums, and rental obligations.

The accounts payable prcess enables a business to accurately review, process, and plan for such payments without affecting the company’s cash flow and maintaining legal and regulatory compliance.Â

Examples of Accounts Payable

Some noteworthy examples of accounts payables that businesses must immediately record with the accounts payable department for accurate reporting, bookkeeping, and processing timely payments are:

  • Purchase of Goods, Raw Materials, Equipments, and Products
  • Freelance and Subcontracted services
  • Energy and Fuel Consumption
  • Employee Expenses
  • Leases, licensing, and Rental payments owed
  • Transportation
  • Logistics
  • Licensing
  • Leasing

The Accounts Payable Process

The accounts payable process ensures timely payments to vendors and suppliers for goods and services purchased on credit to maintain long-standing positive business relationships while avoiding penalties and late fees.

Let us look at some of the main stages of the accounts payable process.

1. Invoice Capture

When a business purchases a product or service from an external supplier or vendor, the service provider typically generates an invoice containing the relevant purchase details.Â

The first task of any account payable department is to accurately capture and record these invoices when they receive them, including information on the purchased goods or services, payment terms, and instructions.Â

2. Invoice Approval

Once the invoices are obtained and captured, it is vital to scrutinize them by checking them against your purchase order to ensure no discrepancies with the price, quantity, and other relevant details.

It is worth noting that the accounts payable process requires the completion of invoice verification before they can be approved and proceed to the next stage.Â

3. Payment Authorization

The next stage of the accounts payable process is payment authorization, where the Accounts payable professionals must review and authorize the payments for the approved invoices. This stage is crucial for detecting and mitigating errors and fraudulent invoicing.

An ideal workflow ensures that all relevant departmental heads, finance team members, and executives are included in the payment authorization stage to maximize the accuracy of authorized invoices.

This method ensures proper scrutiny is performed on each invoice by the relevant departmental head or professional behind the purchase order, reducing the business’s risk exposure.

4. Payment Execution

The final stage of the accounts payable process is payment execution. This stage occurs after the accounts payable department works with all relevant stakeholders to accurately collect, approve, and authorize the appropriate payments.

Once the accounts payable department completes these prerequisites stages, they can disburse the appropriate payments to the creditor.

In most scenarios, accounts payable execute payments via cash, cheque, electronic money transfer, or other forms of payment, depending upon the preferences and terms agreed upon by both parties.

Why You Need to Automate Accounts Payable

If managing accounts payable gives you anxiety and is a constant challenge, automated accounts payable software may be the right direction for your business. Such software can significantly reduce workload, minimize errors, and ensure timely payment of debts by completely automating the accounts payable process.

Automated accounts payable software offers OCR invoice scanning, automated approvals, global cross-border payments, and document management to speed up and secure the accounts payable process.

Some exceptional automated Accounts payable solutions even offer advanced capabilities such as:

  • Self-service supplier onboarding
  • Tax compliance
  • Fraud prevention
  • Payment discount optimization,
  • Electronic document matching
  • Online multi-currency global mass payments
  • Secure payment methods
  • Automatic payment reconciliation.

By choosing the right software, you may be able to instantly:

1. Replace Human Error With Machine Accuracy

The most significant damages to your cash flow arise from human errors. These errors can occur internally within your departments or outside your business with your vendors and suppliers.Â

We have witnessed countless cases where minor mistakes from internal and external sources lead to incorrect payments costing businesses substantial sums of cash.

Automated accounts payable software can quickly mitigate this problem by accurately automating the task of capturing the appropriate invoice information.Â

Additionally, automation saves companies valuable time and money by dramatically reducing errors and eliminating fraudulent and duplicate invoices.

2. Save Several Hours of Effort

Remember, time is an invaluable commodity for businesses, much like with every other aspect of life. Streamlining your accounts payable process with automation can free up a considerable amount of this commodity by improving efficiency, eliminating manual data entry, slashing processing times, reducing delays due to errors, and ultimately freeing up countless hours of effort.

Automation frees the accounts payable department to address more pressing issues rather than burn valuable resources rectifying mistakes made by inefficient accounts payable processes.

3. Create an Optimized Audit Trail

Most businesses and their accounts payable departments struggle to mitigate fraud and compliance risks because they fail to implement policies and procedures around accounts payable management. As a result, they fail to facilitate a clear audit trail for internal and external purchases.

On the other hand, the automated accounts payable process can help companies comply with regulatory requirements and avoid legal and financial penalties by maintaining accurate records and conducting regular audits.

These audits should include a review of invoices, purchase orders, and payment records.

Your company could run a quarterly audit of its accounts payable processes to identify any discrepancies or areas for improvement.Â

Companies engaged in automated accounts payable solutions can also demonstrate their commitment to compliance and avoid potentially costly fines and legal action.Â

Regular accounts payable audits can help identify inefficiencies, errors, and potential fraud.Â

4. Standardize the Process

Ultimately, it all boils down to how well your accounts payable process is structured. A good solution is adapting an automated solution that can standardize the accounts payable process, ensuring consistency and reducing the risk of errors.

An automated accounts payable solution can also help you create an invoice processing checklist that outlines the required information, such as invoice number, vendor name, and purchase order number, ensuring that all invoices are processed consistently and accurately.

Businesses that transition to automated accounts payable solutions can instantly map out their current accounts payable process and immediately identify and address areas for improvement.

Automated accounts payable software also makes it significantly easier to create clear guidelines for invoice processing, approval workflows, and payment schedules that suit your business’s individual nature.

To wrap up, now that you understand what is accounts payable and how it crucial to optimize your accounts payable process and maintaining healthy internal cash flow control has never been easier with automated accounts payable software.

But, of course, investing in the right technology that suits your individual business requirements is vital.Â

So explore the options available to you that can effortlessly help streamline your accounts payable tasks and guarantee better expense management for your company.

Zapro Automates Accounts Payable with Unmatched Accuracy

Zapro is a comprehensive Accounts Payable Automation (AP Automation) solution that streamlines communication, documentation, and payments for accounts payable.Â

With Zapro, AP departments can easily manage and track corporate spending with faster, automated workflows and approvals facilitated by centralized communication focusing on the invoice.Â

This allows for better collaboration and communication with approvers, vendors, and other purchase stakeholders.