Accounts payable

An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable entry is found on a balance sheet under the heading current liabilities.

Accounts payable are often referred to as "payables".

Another common usage of AP refers to a business department or division that is responsible for making payments owed by the company to suppliers and other creditors.

Investopedia Says:
Accounts payable are debts that must be paid off within a given period of time in order to avoid default. For example, at the corporate level, AP refers to short-term debt payments to suppliers and banks.

Payables are not limited to corporations. At the household level, people are also subject to bill payment for goods or services provided to them by creditors. For example, the phone company, the gas company and the cable company are types of creditors. Each one of these creditors provide a service first and then bills the customer after the fact. The payable is essentially a short-term IOU from a customer to the creditor.

Each demands payment for goods or services rendered and must be paid accordingly. If people or companies don't pay their bills, they are considered to be in default.

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List of debts currently owed by a person or business. These are debts incurred mainly for the purchase of services, inventory, and supplies. The accounts normally do not include accrued salaries payable, accrued interest payable, or rent payable. This list is kept in the ordinary course of the debtor's business. See also Accounts Receivable.

Accounts payable is the term used to describe the amounts owed by a company to its creditors. It is, along with accounts receivable, a major component of a business's cash flow. Aside from materials and supplies from outside vendors, accounts payable might include such expenses as taxes, insurance, rent (or mortgage) payments, utilities, and loan payments and interest.

For many small businesses, the significance of every overdue payment can often be greatly magnified. For this reason, it is absolutely essential for entrepreneurs and small business owners to deal with the accounts payable side of the business ledger in an effective manner. Bills that are unpaid or addressed in a less than timely manner can snowball into major credit problems, which can easily cripple a business's ability to function.

By making informed projections and sensible provisions in advance, the small business can head off many credit problems before they get too big. Obligations to creditors, ideally, should be paid off concurrently with the collections of accounts receivable. Payment checks should also be dated no earlier than when the bills are actually due. In addition, many small companies will find that their business fortunes will take on a cyclical character, and they will need to plan for accounts payable obligations accordingly. For instance, a small grocery store that is located near a major factory or mill may experience surges in customer traffic in the day or two immediately following the days in which paychecks are disbursed at that facility. Conversely, the store may see a measurable drop in customer traffic during weeks in which the factory or mill is not distributing paychecks to employees. The canny shop owner will learn to recognize these trends and address the accounts payable portion of his or her business accordingly.

Generally, not all bills will need to be paid at once. Expenses such as payroll, federal, and local taxes, loan installment payments, and obligations to vendors will, in all likelihood, be due at various times of the month, and some—such as taxes—may only be due on a quarterly or annual basis (tax payments should always be made on schedule, even if it means delaying payment to vendors; it is far better to dispute a tax bill after it's been paid than to run the risk of being charged with costly fines). It is important, then, for small business owners to prioritize their accounts payable obligations.

Prioritizing and Monitoring

This is especially true for fledgling business owners who are often stretched pretty tightly financially. Entrepreneurs who find themselves struggling to meet their accounts payable obligations have a couple of different options of varying levels of attractiveness. One option is to "rest" bills for a short period in order to satisfy short-term cash flow problems. This basically amounts to waiting to pay off debts until the business's financial situation has improved. There are obvious perils associated with such a stance: delays can strain relations with vendors and other institutions that are owed money, and over-reliance on future good business fortunes can easily launch entrepreneurs down the slippery slope into bankruptcy. Another option that is perhaps more palatable is to make partial payments to vendors and other creditors. This good-faith approach shows that an effort is being made to meet financial obligations, and it can help keep interest penalties from raging out of control. Partial payments should be set up and agreed to as soon as payment problems are forecast, or as early as possible. It is also a good idea to try to pay off debts to smaller vendors in full whenever possible, unless there is some clear benefit to be had in making installment payments to them.

Usually, signs of cash flow problems will start to show up well before the company's financial fortunes become truly desperate. One key concern is aged payables. Bills should never be allowed to "ripen" more than 45 to 60 days beyond the due date, unless a special payment arrangement has been made with the vendor in advance. At 60 days, a company's credit rating could be jeopardized, and this could make it harder to deal with other vendors and/or loaning institutions in the future.

Outstanding balances can drive interest penalties way up, and this trend is obviously compounded if many bills are overdue at the same time. Such excessive interest payments can seriously damage a business's bottom line. Business owners should keep in mind, however, that it is in the best interest of vendors and other creditors to keep the fledgling business solvent as well. Explaining current problems and their planned solutions to creditors can deflect ill feelings and buy more time. Some—though by no means all—creditors may be willing to waive, or at least reduce, growing interest charges, or make other changes to the payment schedule.

It is crucial to the success of a small business that accounts payable be monitored closely. Ideally, this aspect of the firm's operations would be supervised by a financial expert (either inside or outside the company) who is not only able to see the company's financial "big picture," but is able to analyze and act upon fluctuations in the company's cash flow. This also requires detailed record keeping of outstanding payables. Reports ought to be checked on a weekly basis, and when payments are made, copies should be filed along with the original invoices and other relevant paperwork. Any hidden costs, such as interest charges, should also be noted in the report. Over a period of time, these reports will start to paint an accurate cash flow picture.

Effective monitoring practices not only ensure that payments are made to vendors in a complete and timely fashion, but also serve to protect businesses against accidental overpayment. These overpayments, which often take the form of overpayment of sales and use taxes, can be caused by any number of factors, including internal miscommunication, encoding errors, sloppy or inadequate recordkeeping practices, or ignorance of current tax codes. Internal audits of accounts payable practices can be an effective method of addressing this issue, especially for expanding companies. "As companies grow, owners tend to become less involved in day-to-day operations and relinquish control of some functions to staff," stated Cindy McFerrin in Colorado Business Magazine. "Set up systems and procedures in your company that encourage communication, provide for staying current with tax codes, and lessen the risk of multiple payments and other mistakes. Laying the groundwork for accuracy today can keep you profitable and in control tomorrow."

Further Reading:

Anthony, Robert N., and Leslie K. Pearlman. Essentials of Accounting. Prentice Hall, 1999.

Cornish, Clive G. Basic Accounting for the Small Business: Simple, Foolproof Techniques for Keeping Your Books Straight and Staying Out of Trouble. Self-Counsel Press, 1993.

Ludwig, Mary S. Accounts Payable: A Guide to Running an Efficient Department. John Wiley, 1998.

McFerrin, Cindy. "Understanding Overpaying." Colorado Business Magazine. December 1997.

For more information on account payable, visit Britannica.com.

A debt owed by a business that arises in the normal course of its dealings, that has not been replaced by a note from another debtor, and that is not necessarily due or past due.

Bills for materials received or obligations on an open account may be accounts payable. This kind of liability usually arises from a purchase of merchandise, materials, or supplies.

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Accounts payable is a file or account that contains money that a person or company owes to suppliers, but has not paid yet (a form of debt). When you receive an invoice you add it to the file, and then you remove it when you pay. Thus, the A/P is a form of credit that suppliers offer to their purchasers by allowing them to pay for a product or service after it has already been received.

The profession is unregulated, though there are international standard setting bodies, an example of which is the International Accounts Payable Professionals (IAPP), an association of more than 5,000 members in the United States, Canada, the United Kingdom and other countries.^[1] As part of its Professional Standards Framework,^[2] the IAPP has established a new definition of accounts payable:

Accounts payable is a strategic, value-added accounting function that performs the primary non-payroll disbursement functions in an organization. As such, the AP operation plays a critical role in the financial cycle of the organization. AP enables an organization to accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of the entire payables process. In addition to the traditional AP activities whereby liabilities to third-party entities (suppliers, vendors, taxing authorities, etc.) are recognized and paid based on the credit policies agreed to between the company and its suppliers, today's AP departments have taken on much wider roles including fraud prevention, cost reduction, workflow system solutions, cash-flow management, internal controls and vendor (supply chain) financing.^[3]

In households, accounts payable are ordinarily bills from the electric company, telephone company, cable television or satellite dish service, newspaper subscription, and other such regular services. Householders usually track and pay on a monthly basis by hand using cheques or credit cards. In a business, there is usually a much broader range of services in the A/P file, and accountants or bookkeepers usually use accounting software to track the flow of money into this liability account when they receive invoices and out of it when they make payments. Increasingly, large firms are using specialized Accounts Payable Automation to automate the paper and manual elements of processing an organization's invoices.

Commonly, a supplier will ship a product, issue an invoice, and collect payment later, which creates a cash conversion cycle, a period of time during which the supplier has already paid for raw materials but hasn't been paid in return by the final customer.

When the invoice arrives it is matched to the packing slip and purchase order, and if all is in order, the invoice is paid. This is referred to as the three-way match. ^[4]

Contents 1 Expense administration 2 Internal controls 3 Audits of accounts payable 4 See also 5 References

Expense administration

Expense administration is usually closely related to accounts payable, and sometimes those functions are performed by the same employee. The expense administrator verifies employees' expense reports, confirming that receipts exist to support airline, ground transportation, meals and entertainment, telephone, hotel, and other expenses. This documentation is necessary for tax purposes and to prevent reimbursement of inappropriate or erroneous expenses. Airline expenses are, perhaps, the most prone to fraud because of the high cost of air travel and the confusing nature of airline-related documentation, which can consist of an array of reservations, receipts, and actual tickets.

Petty cash is also usually paid out by A/P personnel in the form of a check made out to an employee, who cashes the check at the bank and puts the cash in the petty cashbox.

Internal controls

A variety of checks against abuse are usually present to prevent embezzlement by accounts payable personnel. Separation of duties is a common control. Nearly all companies have a junior employee process and print a cheque and a senior employee review and sign the cheque. Often, the accounting software will limit each employee to performing only the functions assigned to them, so that there is no way any one employee – even the controller – can singlehandedly make a payment.

Some companies also separate the functions of adding new vendors and entering vouchers. This makes it impossible for an employee to add himself as a vendor and then cut a cheque to himself without colluding with another employee. This file is referred to as the master vendor file. It is the repository of all significant information about the company's suppliers. It is the reference point for accounts payable when it comes to paying invoices. ^[5]

In addition, most companies require a second signature on cheques whose amount exceeds a specified threshold.

Accounts payable personnel must watch for fraudulent invoices. In the absence of a purchase order system, the first line of defense is the approving manager. However, A/P staff should become familiar with a few common problems, such as "Yellow Pages" ripoffs in which fraudulent operators offer to place an advertisement. The walking-fingers logo has never been trademarked, and there are many different Yellow Pages-style directories, most of which have a small distribution. According to an article in the Winter 2000 American Payroll Association's Employer Practices, "Vendors may send documents that look like invoices but in small print they state "this is not a bill." These may be charges for directory listings or advertisements. Recently, some companies have begun sending what appears to be a rebate or refund check; in reality, it is a registration for services that is activated when the document is returned with a signature."

In accounts payable, a simple mistake can cause a large overpayment. A common example involves duplicate invoices. An invoice may be temporarily misplaced or still in the approval status when the vendors calls to inquire into its payment status. After the A/P staff member looks it up and finds it has not been paid, the vendor sends a duplicate invoice; meanwhile the original invoice shows up and gets paid. Then the duplicate invoice arrives and inadvertently gets paid as well, perhaps under a slightly different invoice number.

Audits of accounts payable

Auditors often focus on the existence of approved invoices, expense reports, and other supporting documentation to support checks that were cut. The presence of a confirmation or statement from the supplier is reasonable proof of the existence of the account. It is not uncommon for some of this documentation to be lost or misfiled by the time the audit rolls around. An auditor may decide to expand the sample size in such situations.

Auditors typically prepare an ageing structure of accounts payable for a better understanding of outstanding debts over certain periods (30, 60, 90 days, etc). Such structures are helpful in the correct presentation of the balance sheet as of year end.

See also

Look up accounts payable in Wiktionary, the free dictionary.

• Accounts receivable
• Payroll
• American Accounts Payable Association
• International Accounts Payable Professionals
• List of finance topics
• Invoice reader
• Creditor Reference

References

This article includes a list of references, related reading or external links, but its sources remain unclear because it lacks inline citations. Please improve this article by introducing more precise citations where appropriate. (October 2007)

1. ^ http://www.theiapp.org
2. ^ http://www.theiapp.org/standards IAPP Professional Standards Framework
3. ^ http://www.theiapp.org/apdefinition IAPP Definition of Accounts Payable
4. ^ Schaeffer, Mary S. (2007). Controller and CFOs Guide to Accounts Payable. John Wiley & Sons. ISBN 047178589X. 
5. ^ Schaeffer, Mary S. (2006). Accounts Payable & Sarbanes Oxley: Strengthening Your Internal Controls. John Wiley & Sons. ISBN 0471785881. 

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