What is the Accounts Payable Process?

September 6, 2023

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The accounts payable (AP) process encompasses almost all of the payments a business has to make or process, with the exception of payroll. Examples of payables include raw materials, transportation and logistics, equipment, and software subscriptions.

An efficient AP process is necessary to make timely and accurate payments. Sluggish accounts payable processes 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. PO Goods receipt or Bill of Lading
  3. Vendor invoices

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Steps of the accounts payable process

A healthy AP cycle is important because it creates a transparent, 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 the steps to the AP cycle:

Step 1: Purchase order confirmation 

Once a buyer submits a purchase order to the supplier, the buyer logs that PO with a sufficient description and pending amount payable. This is basically the creation of a receipt or bill of lading.

Step 2: Vendor invoicing

The supplier 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 accounting software 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 bill details: 

  • 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 payment. It is essential to file a copy of the payment to ensure a clear audit trail.

Accounts payable in accounting

Accounts payable, a form of accrual accounting, is listed under current liabilities on a business balance sheet. Current liabilities are short-term financial obligations that are due within one year. Failure to pay within the designated time frame can lead to financial defaults. 

Accounts Payable vs. Accounts Receivable 

Accounts payable and accounts receivable are basically opposites: payables are the funds that your business owes to others, while receivables are the funds owed to your business (such as payments from customers). 

How to record accounts payable

Recording accounts payable involves double-entry bookkeeping, in which the following process happens: 

  1. Debit the asset or expense account for the good or service purchased
  2. Credit the accounts payable account for the same amount when a bill or vendor invoice is received

Once the accounts payable bill is paid, your accountant will then debit accounts payable and credit the cash account. 

How to create an accounts payable process guide

Creating a clear, comprehensive guide to AP processes and procedures helps limit errors and confusion. 

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 vendor 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.

Why you should automate the accounts payable process

You might consider either fully or partially automating your company’s AP process for several reasons. Accounts payable automation can reduce manual data entry errors via invoice capture and provide detailed reports for the full AP cycle, ultimately helping organizations better manage their finances. Using this type of automation can also save time and effort, eliminate unnecessary errors, and help companies boost their bottom line.

By creating an automated vendor database, your business is able to:

  • Manage all of its vendors in one location
  • Ensure the payment is recorded as it is processed
  • Easily identify the contact person for each vendor
  • See how much you’ve paid each vendor in a given time frame.

How Settle can help streamline your financials

A high-quality accounts payable process helps your company run efficiently and fairly, and maintain better relationships with your suppliers. After all, no one likes getting paid late. With Settle, it’s easy to manage the AP process on one centralized platform that also integrates with your accounting software. Settle streamlines AP for your company with tools like text recognition, approval rules, stored vendor credits, and split payments. You can even delay payment to a vendor while Settle handles the invoice for you, ensuring you have enough working capital to improve cash flow and grow your business. Contact us to find out more.

Still unsure about the AP process? Our trusted partner, Decimal, can help with that and streamline more of your back office operations. Decimal’s dedicated teams tackle financial operations for your business from bookkeeping to expense management, and more. Get started today.

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*The information in this article is for informational purposes only and should not be construed as legal, financial, or professional advice. Settle makes no representation or warranties, expressed or implied, and in no event shall Settle or its affiliates, agents, or employees be liable to you or anyone else for any decision made or action taken in reliance on the information contained herein.