There are several phases of the full cycle of accounts payable as explained in the following subtopics;
Accounts payable, on the other hand, is the money that a business owes to its suppliers and vendors for products or services that have been procured. The management of accounts payable is a very critical activity in any organization aimed at ensuring good cash flow and suppliers. In this article, the process of accounts payable will be described starting from the purchase requisition till payment of the vendor.
Accounts payable can therefore be described as beginning with a purchase requisition. This is a memo that is prepared by an employee within the company who seeks to buy things from outside the company by procuring them from a supplier. It indicates the kind of items required for an order, how many of these are required, their estimated price, and the date by which they should be delivered.
A purchase order cannot be made before the requisition is approved, which may be a manager depending on the internal policies of an organization. Recurring authorizations involve approving requisitions as a way of trying to minimize unnecessary spending.
Once any purchase requisition passes through all these stages, a purchase order is prepared and issued to the vendor. A PO legally validates the purchase and becomes a document between the buyer and the supplier.
It includes all the order information that is required to be forwarded to the supplier such as the product description, quantity to be purchased, the agreed price, the delivery schedule, and the shipping and payment terms to be followed. The PO contains all the details on the goods that the buyer wants the seller to provide and the seller proceeds to deliver the order.
When generating purchase orders, the buyers must bargain for a price that is fair especially the payment and delivery terms with the sellers. Accurate POs, when written, ensure that there are no ambiguities at a later stage.
The receiving department then checks and counts all the incoming goods or services against the data in the PO once the ordered goods or services have been delivered. This confirmation process is called goods receipt and ensures:
- Delivery status All items ordered have been delivered.
- They confirm the quantities specified in the PO to ensure that the quantities received are accurate and meet the company’s requirements.
- It is important to note that there are never any used, old, worn out, defective or damaged products.
- A few of the component details such as the part numbers correspond with the ordered ones.
Discrepancies have to be relayed to buyers immediately so that the supplier can be confronted regarding the problems. Only the received goods that meet the acceptable state should continue through the rest of the AP process.
The items are then delivered to different departments in the relevant company where they were purchased through a purchase requisition. As for the receipt of the goods, it is recorded through updating the inventory and AP entries.
As it is standard practice, vendors send an invoice after dispatching purchase orders according to the arrangements. The supplier invoice contains critical payment information, including The supplier invoice contains critical payment information, including:
- Invoice number and date of the current invoice to make sure it matches the one they received.
- customer name and address
- PO number
- List of specific products/services offered
- The amount of the product that has been delivered and other amounts that have been charged
- Payment Timeline- Total amount due
The accounts payable team must match the supplier invoices to the corresponding POs and other supporting documents for goods receipt before making payment. This check ensures the coding corresponds with the billing information on all related forms.
In cases where invoice amounts or quantities differ from the Authorized amounts or quantities, suppliers’ assistance is required to explain differences. The problem may involve invoicing issues like erroneous billing, fraud, or simply duplicated invoices.
This process is where information that was evaluated as correct and reliable during the 3-way matching process of supplier invoices gets input into the accounting records. This reconciles accounts payable and shows the exact amount of money that each vendor is still owed by the company.
Invoice field data captured include vendor details, invoice date, amount due, due date, matching PO number, and GL account number. Supplier invoices play a crucial role in creating organizational financial statements or cash flow statements.
Certain firms, for instance, capture paper invoices as PDF documents and retain both the original data and these PDFs in electronic form. They are also easy to retrieve when needed given that they are well organized in the database.
In enterprise resource planning (ERP) systems, supplier invoices may be subjected to an invoice approval workflow before payments are released. Pre-audit: Invoice approvers confirm that certain details are correct and in line with procurement standards.
It is usually held by the department heads and other superiors who have control over certain departments or expenditure lines. They can confirm that the purchases were needed, proper procedures have been adhered to, the right rates were applied, coding is proper, and so on.
To increase the extent of internal controls on expenditures, the inclusion of an invoice approval step is valuable. It corrects any errors or irregularities when payments are being processed before the end user is issued with the payment.
Once there is an internal approval of invoices, a company is in a position to meet the obligations with the vendors. Payment methods and the time to make the remittances vary depending on the contracts made between the company and the suppliers.
Common payment options include:
- Cheques – used in situations where the firm does not have a potentially heavy credit exposure to a particular supplier.
- Automatic Clearing House transfers – effective for making electronic payments to recurring vendors.
- ACH transfers – suitable for making payments to domestic suppliers, and where the payments need to be made urgently.
- Purchase cards – here the employee has freedom of choice but the overall price may be relatively high as compared to the transaction fee.
The account payable department gets ready for payment to clear the account with the corresponding credit limits. This eliminates the chances of getting charged for late payment and also keeps good relations with the suppliers.
Suppliers are alerted each time payments are made and this is normally made by remitting the supplier invoice indicating that a payment was made to it. Related master accounts in the general ledger are also adjusted to record the cost of goods and services purchased and cash paid.
This now covers the entire cycle of accounts payable from the beginning of the purchase to the payment process.
The following outlines the necessary steps to effectively implement smooth accounts payable: Raising Purchase Requisitions, Receiving Supplier Invoices, Matching Invoices to Purchase Requisitions, Approval Supplier Invoices, Payment run, and finally Supplier Payments. Key stages include:
1. Prepare and submit purchase requisitions and their subsequent approval
2. Purchase order creation and dispatch
3. It involves the acceptance of products in the organization as well as evaluating their quality.
4. Suppliers’ invoices with PO and goods receipt
5. Making entries of invoices as recorded in the accounting system
6. Escalating invoices to approvals for verification of the details.
7. Making timely vendor payments
Integration of AP activities and the institution of additional controls to the various processes results in increased efficiency, accuracy of data, compliance, and effectiveness in decision-making. It also helps to consolidate the relationships with the vendors by having structure and proper methods of approaching procurement as well as paying on time.
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