What does Account Payable Do?

Simply said, accounts payable is a record of the amounts paid to the suppliers; the department handling these accounts is a component of the company.

Knowing that AP is one of the fundamental components of any company's finances helps one to appreciate its importance. All invoices and bills that must be paid to outside vendors and suppliers—that is, products and services—that the accounts payable office handles are under their responsibility.

Handling accounts payable—that is, purchases of goods or services—including payment for them falls to departments called accounts payable.

The key responsibilities of an accounts payable department typically include:

- Approval Submissions – When an invoice arrives from a supplier, the AP department has to work through it, record it, and then confirm its accuracy for payment. These include checking of date, amount, purchase order number, receipts for goods/services received, tax charges, etc.

- Payment Process – Once the invoices go through the cycle and gain approval, the AP department proceeds with the payment of the suppliers and vendors. This is done through writing checks, electronic transfers, or any other payment arrangements. The AP system monitors all the vouchers that are outstanding for invoice and payment.

- Accounts Payable control accounts include detailed sub-ledgers for each vendor and contain records of prior payment history and outstanding bills due. This is connected to the general ledger and consolidated financial statements.

- AP affects cash flow Payable Management in that the department needs to predict liabilities to be made in the future and ensure the treasury is notified of the cash required.

- Handling Supplier Refunds – In case any supplier is refunded for goods that were rejected or overpayment was made, it’s the responsibility of the AP department to ensure that they recover their money or adjust their account.

- Accounts Receivables - Particular attention needs to be paid to the issue of auditing all invoices and payments in compliance with the policies and procedures of the organization, as well as applicable accounting standards and tax laws.

- Documentation – The AP department has to prepare and submit different reports to the management and the financial department on payment terms, specific suppliers, previous payments, cost estimates, and cash flow projections. This aids decision-making.

- supremacy and Dispute Resolution – Any discrepancies or disputes that develop with the vendors have to be resolved by consulting the top management and the suppliers for a possible solution to the problems.

- Year-end activities – Extra works such as reporting and auditing are done at fiscal year-end following the preparation of financial statements and closing of accounts. Open invoices or payments that were not cleared need to be addressed.

The following sections are some of the major sub-processes, which are involved in the Accounts Payable Process Flow:

A typical accounts payable process has multiple steps that ensure proper recording and payment of supplier invoices:

1. Purchase Order Creation – This is an initial process that entails the information of a department’s purchase order to enter the AP system.

2. Receipt of Goods/Services – At times, the confirmation of receiving the ordered items is documented in the system.

3. Invoice Receipt – The actual invoice from the supplier is obtained, and it is compared with the PO and checked for arithmetical and factual accuracy, tax compliance, approval, etc.

4. Invoice Input – Finally, the invoice is recorded in the accounting software by providing details such as supplier data, dates, amounts to be billed, account codes, payment terms, etc.

5. Invoice Approval – The managers receive and approve all invoices above a specific amount. This means that the invoice can be paid, and it is the final approval.

6. Payment – You can either pay the vendors on due dates by check or electronic funds transfer such as ACH or wire transfer. Satisfaction of this resolves the balance.

7. Vendor File – Paid invoice balances are recorded in the vendor’s ledger and the general ledger.

8. Month-end & Year-end Close – Closing entries, analysis, reconciliations, and other reports/ audits are prepared to complete accounting for the month and year.

Struggling for better accounts payable management is very important for any growing company to manage its cash inflow and outflow effectively, protect the company’s assets against fraudulent activities, ensure that the suppliers and vendors are paid on time to keep them happy, and maintain clean accounts. The AP department is therefore a core strategic business enabler that supports reliable continued company functioning.