Everything A Business Owner Must Know About Accounts Payable

• Reading Time: 7 Minutes
• Published: October 13, 2021
• Last Updated: January 14, 2025

A business incurs several liabilities in its lifetime. One of the most significant liabilities, among others, are accounts payable that determine the nature of the relationship with the suppliers. A healthy accounts payable process of a company enhances its reliability and creditworthiness in the eyes of the stakeholders. Therefore, every business owner needs to know what this process entails precisely. Here is a definitive guide about everything accounts payable.

Meaning:
Accounts payable refers to the money owed to suppliers and creditors. It involves purchases made on credit. The supplier sends you an invoice that needs to be paid by its due date. You may pay early or on the due date itself. It is a short-term liability recorded in the balance sheet under ‘current liabilities’ in the accrual basis of accounting.

Is it an expense?
Although accounts payable are technically outstanding expenses, it does not represent an expense account—the double-entry accrual system of accounting records expenses related to accounts payable along with it.

Why is it Essential to Handle Accounts Payable?

A business cannot survive in the market for long if they do not maintain an active accounts payable process. The following points illustrate its significance in a simplified manner:

• Enhancing credibility: You can pay your creditors on time when you maintain and update your accounts payable process regularly. It will create a positive and healthy relationship with them. Your credibility and reliability will enhance in the industry because of timely payments. Also, you can avail of better discounts and quality supplies from your suppliers and even convert your short-term liability into the long term.

• Save money: You can make early payments when you know the due dates of accounting payables. It will enable you to avail of heavy discounts and incentives from the suppliers. Also, you save on the penalties or punishments in case of delay in payments. Thus, you can save money without any effort.

• The systematic flow of business: When you pay your bills on time, the vendors get impresses and ensure an uninterrupted and continuous flow of supplies to your workplace. It enables your business operations to go smoothly without coming to a dead end. Additionally, it enhances efficiency by preventing any duplication errors in the accounts payable process.

• Better management of cash flow: Maintaining the accounts payable on a routine basis allows the firms to pay only when due. It also enables you to avail yourself of credit opportunities from vendors whenever possible.

• No frauds: Your payables may undergo major scams and fraud that stumble the foundation of their business. Therefore, accurately following the accounts payable process will remove the chances of fraud and scams.

Accounts Payable Process:

Every firm usually employs some staff to manage the payables. The structure of the payables department depends on:
• the number of vendors,
• the volume of payments,
• and the nature of the reports

The Accounts Payable Process Begins With:
• Receiving the invoice: After you place an order with the supplier, he sends you an invoice with the transaction details and the due date for payment.
• Analyzing the details: You should check the details of your vendor on the internet: name, authorization, due date, bill amount, etc.
• Updating the records: Once you receive the invoice, you should update the details on your software system. It will alarm you when the payment date comes.
• Making payment: Accounts payable is not about what, why, where you lose. Its success depends on timely payment to the suppliers. The liability will reduce once you make your payment.

How to Stay on Top of Your Accounts Payable Process?

• Automation is the key:

Although the older generation is not that happy with automation in every industry, it has made work-life relatively more manageable. Going paperless doesn’t just save a firm’s time, resources, and money; it also positively impacts the environment. Electronic accounts payable outsource services streamline the process and make it easier to store and search. While physical invoices can be misplaced or fade with time, electronic invoices remain in the backup server for as long as you want. Also, there are minimal errors in using accounting software for accounts
payable rather than paper.

• Schedule a reminder:

You should set automated reminders on your accounting system to remind you of the upcoming due dates. Physically, you can note down the payables date and mark it on the calendar where everyone can see it. It will ensure that you do not miss out on any payment.

• Manage your cash flow:

Ensure that you have enough cash in hand when the due date comes. If you do not have enough money, you won’t be able to pay the supplier, which will cause relations to turn sour. Therefore, along with a detailed accounts payable process, you should also maintain a healthy cash flow.

Accounts payable turnover ratio:

In the accounts payable turnover ratio, we judge how quickly the business pays its bills. The formula is:

Accounts payable turnover ratio= Credit purchases/Average trade payables

A high ratio is favourable, but an extremely low or high percentage is not.

Difference Between Accounts Payable and Receivable:

While the accounts payable process is a liability that signifies the money you owe to the vendors, accounts receivable is an asset that represents money that your customers owe you. The former involves payment of money in the future to somebody else. Whereas the latter records money that you will receive from your debtors. Both are short-term and recorded in the balance sheet of the company.

The accounts payable process helps you manage your short-term debts efficiently. It is a tedious and time-consuming process. However, with expert guidance and a dedicated support team, you can reach heights in accounts payable.

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