The accounts payable (AP) process encompasses almost all of the payments a business has to make or process, with the exception of payroll.

An efficient AP process is necessary to make timely and accurate payments. Sluggish accounts payable can lead to production and supply problems that can greatly affect a company’s bottom line.

There are three important documents in the basic accounts payable cycle:

  1. Purchase order (PO) 
  2. Goods Receipt
  3. Vendor invoices 

The Accounts Payable Process

A healthy AP cycle creates a symbiotic relationship between a vendor and a buyer. The accounts payable team is able to track the vendor’s payment every step of the way. Here are a few of the major checkpoints:

Step 1 | Purchase Order Confirmation 

Once a purchase order has been submitted from a vendor, the buyer logs that PO with a sufficient description and pending amount payable. This is basically the creation of a receipt.

Step 2 | Vendor Invoicing

The vendor will then create an invoice for the goods they provided or the service they rendered. Once the buyer receives this invoice, they will log the invoice in their system with a specific due date.

Step 3 | Invoice Verification

After receiving the invoice, the AP team will then verify the invoice and authorize it for payment. Verification is the primary goal of accounts payable.

The invoice must contain the following information: 

  • The proper unit costs, calculations, totals, and terms
  • What the company ordered
  • What the company received

Step 4 | Remit Payment

Once the invoice is marked as legitimate and accurate, the remittance is scheduled for the next pay period for outgoing checks. It is essential to file a copy of the check to ensure a clear audit trail.

The Importance of Three-Way Matching

A three-way match is an important technique used often in the accounts payable process. This method ensures that only valid and accurate vendor invoices are recorded and paid. 

The three-way match includes the following:

  • Company purchase order — what the company had ordered and at what cost
  • Company receiving report — what the company received
  • Vendor invoice — what the vendor billed the company

When the details on all three of these documents match, then and only then will the invoice be entered into the AP account and scheduled for payment.

Three-way matching is used to mitigate the acceptance of fraudulent invoices. For example, one person will prepare the company’s purchase orders while another prepares the company’s receiving reports. A third person should compare each PO, receiving report, and vendor invoice.

However, the three-way match method is not always a viable option. Occasionally vendor invoices do not have purchase orders or receiving reports. An example of this would be utility bills that have pre-established amounts. A company will not often issue a purchase order for electricity, as it will be billed based on usage. The same is true for water, telephone, and natural gas payments.

The three-way matching process is important and helpful, but it can be extraordinarily time-consuming. The process can cause delays in payments that annoy suppliers while compromising the company’s ability to take advantage of early payment discounts.

Creating a Guide to AP Processes

Creating a comprehensive guide to AP processes and procedures can help reduce errors. A typical guide will describe procedures in detail so there is as little confusion as possible. 

A standard AP process guide should include the following.

  • Three-way matching | Once a vendor invoice is received, the company performs a three-way match for consistency against the goods receipt, purchase order, and invoice.

  • Invoice verification | The accounts payable team verifies the company actually received the goods or services before approving the invoice for payment.

  • Invoice auditing | If there is any unexpected variance on the invoice, such as the wrong price or quantity, the AP team will send the invoice to the buyer, who will need to find the source of the issue.

  • Issue payment | After any variances are corrected, the AP department vouches for the invoice, checks, and the team can promptly issue payments.

  • Log payment | The invoice then gets marked as paid in the finance system.

Automating the AP Process

Many companies decide to either fully or partially automate their AP processes. Cash flow and spend can vary based on the time of year, and AP automation can provide detailed reports for the full AP cycle. These reports help organizations better manage their financials when times are tight. Using this type of automation can streamline processes, eliminate unnecessary errors, and help companies boost their bottom line.

By creating an automated vendor database, a company is able to manage all of its vendors in one location, be assured the payment is recorded as it is processed, and easily identify the contact person for each vendor. It will also allow the company to see how much they’ve paid each vendor in a given time frame, helping tremendously with expense management.

How Settle Can Help Streamline Your Financials

A high-quality, streamlined accounts payable process helps to ensure that your company is running efficiently and fairly. You can maintain better relationships with your suppliers when you manage their invoices promptly and accurately. After all, no one likes getting paid late.

Settle can make the difficult AP process much easier to manage. Settle is here to help streamline payment processing for your company with text recognition, approval rules, split payments, and no transaction costs. You can even delay payment to a vendor while Settle handles the invoice for you. That way, you can ensure you have enough working capital to continue to grow your business. Contact us to find out more. 


Accounts Payable Process | AccountingCoach

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When to offer early payment discounts | AccountingTools