A fundamental question of accounting and finance is: what is accounts payable?
Accounts payable (AP) is an accounting term that means: “The money you owe for goods or services you have purchased but not yet paid for.”
Accounts payable also refers to the process, department, or people responsible for paying invoices.
First let’s take a look at how accounts payable works. Then we will dive into some accounts payable examples. After that we’ll explore the day-to-day tasks of an accounts payable department. Finally, we’ll discuss the importance of accounts payable and why it should be automated.
Table of contents
- How Does Accounts Payable Work?
- PO Examples of Accounts Payable
- Non-PO Examples of Accounts Payable
- How Do Companies Handle Accounts Payable?
- What Does an AP Clerk or Department do on a Day-to-Day Basis?
- Why Is Accounts Payable Important?
- How AP Automation Can Maximize AP Processing Efficiency
- Bottom Line – What is Accounts Payable?
How Does Accounts Payable Work?
Upfront payments mean that the price is paid before the good or service is delivered. For example, at a store, you will have to pay for the goods before you can leave with them.
But companies pay most business expenses on an invoice basis. This means the company takes possession of the goods on credit then pays on a later date – typically within 30 days.
In other cases, invoices come through in the form of a bill. Like for rent or utilities.
Invoices also reflect the goods or services that were specifically requested in either a purchase order or some other requisition request.
You can learn more about the difference in these types of accounts payable in our article What is the Difference Between a PO and Non PO Invoice?
PO Examples of Accounts Payable
PO accounts payable expenses arise from purchase orders.
When it’s time to purchase those goods or services, someone familiar with the purchase submits a purchase requisition. The requisition is based on the business plan, budget, and price quotes received from vendors.
After creation, the purchase requisition then goes through an approval process.
After the purchase requisition is approved, the business then produces a purchase order (PO). The PO is then provided to the vendor that has been awarded the business.
This PO is an official commercial document. It is issued by a buyer who is committing to pay the seller for a specific product or service that will be delivered in the future.
Here are some examples of accounts payable arising from PO purchasing:
- Raw Materials
Non-PO Examples of Accounts Payable
Non-PO purchases are the result of spend outside a regulated PO procurement process. This type of invoice is often called an expense invoice.
Non-PO payments can also be the result of contracted products or services.
Examples of accounts payable non-PO expenses may include:
- Lease Payments
- Food and Beverage
- Trade Show Expenses
How Do Companies Handle Accounts Payable?
A company’s finances show AP as a liability.
As you can see from the examples of accounts payable, accounts payable are bills and invoices that you must paid.
An accounts payable department or clerk’s primary responsibility is to process and pay invoices.
Firstly, they review transactions between the company and its vendors/suppliers. Secondly, they ensure that all legitimate invoices get approved, processed, and paid on time.
Processing an invoice includes extracting important data from the invoice and then inputting it into the company’s financial, bookkeeping, or ERP system.
The invoices then go through the company’s business process including invoice approval, filing, and payment.
Lastly, accounts payable pays the invoice.
What Does an AP Clerk or Department do on a Day-to-Day Basis?
The accounts payable process involves an enormous number of detail-oriented tasks.
An AP department must enter only legitimate and accurate invoice details in the accounting system. This information comes from:
- Purchase orders
- Receiving reports/packing slips/receipts
- Invoices from vendors and suppliers
- Contracts and other purchasing agreements
A well-run accounts payable process will also include:
- Accurate capture of data from these documents into the accounting system,
- Timely processing of only accurate and legitimate invoices,
- Obtaining approval for invoice payment from managers,
- Accurate recording of payments in the appropriate general ledger accounts, and
- Reports on obligations and expenses that are not completely processed.
In conclusion, that’s a LOT of time and effort. Moreover, a lot of room for mistakes!
Why Is Accounts Payable Important?
For example, maintaining an organized and efficient accounts payable process allows you to remain aware of the impact AP has on your bottom line.
Moreover, the efficiency and effectiveness of the accounts payable process will affect the company’s cash position, credit rating, and relationships with its suppliers. No-one wants to do business with a company that fails at making payments.
How AP Automation Can Maximize AP Processing Efficiency
Accounting teams use AP Automation (Accounts Payable Automation) to digitize and streamline the processing of purchase orders and invoices.
AP Automation software uses advanced optical character recognition (OCR) technologies integrated with robotic process automation (RPA) software to automate accounts payable PO, invoice, and payment processes.
The best AP automation solutions also use Verified Data Capture Services to achieve near-100% accuracy of AP data automation.
AP automation replaces manual tasks around PO and invoice processing, approvals and payment. And then, importantly, it provides better visibility and control over your financial data.
For example, a full end-to-end AP automation solutions include:
- Purchase Requisition Automation – Automated purchase requisition and approvals.
- Purchase Orders and Confirmation Automation – POs are automatically generated out of purchase requisitions with built-in PO approval and acceptance automation.
- Receiving Automation – Automated receipt confirmation against an open PO upon delivery of goods or services.
- Invoice Processing Automation – Invoice process automation including Verified AP Data Capture Service that delivers near 100% accuracy of invoice data processing, automated 2 way and 3 way PO matching, and easily configurable invoice approval workflows.
- Travel and Expense Automation – Automating the travel and expense reporting process just makes employees happier!
- Payment Automation – The ability to automatically make electronic payments by check, ACH or wire transfer. Or why not use virtual credit cards and receive a 1% rebate on every payment you make!?
To sum up, we’ve put together a quick video about the process:
Bottom Line – What is Accounts Payable?
Accounts payable refers to several things:
- Firstly, amount of money you owe for products / services that you received, but not paid for.
- Secondly, the process of paying that money.
- Lastly, it’s the department and people who manage that process.
In other words, it is critical that your AP be timely, accurate, and free of fraud or waste.