Accounts Payable Definition
Accounts payable (AP) is a short-term debt and a liability on a balance sheet where a business owes money to its vendors/suppliers that have provided the business with goods or services on credit. Accounts payable is also referred to as the department that handles vendor invoices or bills and records the short-term debts in the general ledger (GL). The AP department will verify invoices against (purchase) orders and ensure the goods or services were received before issuing payment to their vendors.
Accounts Payable FAQs
Accounts payable (AP) is a current liability that a company received goods or services on credit from vendors. AP is also a department and a job.
While accounts payable (AP) is the amount of money a company owes its vendors, accounts receivable (AR) is the amount of money owed to a company from its customers. AP is a current short-term liability and AR is a current short-term asset.
Accounts payable is both a credit and a debit. In double entry bookkeeping, the accounts payable department will receive an invoice and it will be recorded in the general ledger as a credit, then as an offsetting debit to the expense account. This matching principle follows the accrual accounting method where revenues and expensive are recorded in the same period, which takes place before the invoice is paid.
Yes, when considering accounts payable receives an invoice for goods or services not yet paid, then that would be considered an outstanding or current liability which a business owes payment to its vendor.
Accounts payable turnover is a ratio used to measure a company’s short-term liquidity, namely, the average rate a given company pays off its vendor(s). The accounts payable turnover ratio is essentially a metric companies use to measure the efficiency in paying off short-term debt.
A high accounts payable turnover ratio means there is a less time from receiving an invoice to the time payment is made. By contrast, a low accounts payable turnover ratio means there is more time from receiving an invoice to the time payment is made.
Common accounts payable job titles include clerk, specialist, manager, director and even vice president dependent on the company size and structure.
The Accounts Payable Workflow
An accounts payable workflow within any given organization begins when a supplier or vendor submits a bill or invoice to the accounts payable department. Upon receiving said invoice, accounts payable clerks will verify the invoice is valid and not a duplicate, code the invoice to the general ledger and depending on the organization’s workflow, conduct a 2 or 3 way match. Accounts payable will then route the invoice for approval and when approved, the invoice is processed for payment.
The Accounts Payable Process
The accounts payable process steps include maintaining the master vendor file, receiving vendor invoices, coding or uploading invoices into a financial or accounts payable automation system, verifying and matching invoices, routing for approval, and processing payments. The accounts payable process also includes responding to vendor inquiries, negotiating terms, and ensuring vendors are paid on time. Other accounts payable processes include maintaining internal controls from identifying duplicate or fraudulent invoices, preventing duplicate payments, and accounts payable audits.
Accounts Payable Software
Companies use accounts payable software to automate manual AP processes like GL-coding, invoice approvals, notifications, and duplicate invoice identification. Accounts payable software provides visibility into current liabilities, processes and improves control over financial information. The software used in AP is also referred to as accounts payable automation software or AP automation software.
Accounts Payable Job Description, Responsibilities & Skills
Accounts payable is a critical function in every finance department. It requires a number of both “soft” and “hard” skills to be truly successful. Many people, even those in other finance roles, are not aware of all the tasks involved in managing a smooth Accounts payable process.
In a typical Accounts Payable Clerk role, the job description typically includes the following responsibilities:
- Calculating, posting business transactions, invoice processing, verifying financial data for use in maintaining records.
- Clarifying questionable invoice items, prices or receiving signatures.
- Obtaining proper information and data regarding invoice payments.
- Verifying and calculating all extensions and totals on invoices.
- Checking vendor files for any previous payments and assigning voucher numbers.
- Maintaining copies of vouchers, invoices or correspondence necessary for files.
- Preparing vouchers listing invoice number, date, vendor address, item description, amounts and coding per accounting policies and procedures.
- Reconciling bank statements.
These different responsibilities require a variety of skills. Some specific skills exhibited by Accounts Payable pros include:
- Great attention to detail
- Data analysis
- Basic accounting knowledge
- Ability to maintain good vendor relationships
- Fast and accurate data entry skills
Clearly, not any old schmo will do. Your next AP hire needs a variety of skills and qualifications to make real contributions to the department’s success. Using the list above will be very useful during the interview process, but is there anything else you should look for in a candidate?
The Skill You Need to Screen for When Interviewing AP
Although AP is largely a numbers-oriented job, it also requires solid communication skills. The best AP professionals are skilled in both managing numbers and managing a number of human relationships, both inside and outside your organization. They not only deal with the primary approvers in different departments, but also other people who contribute critical information to the process, and manage important vendor relationships.
Finding the right person who possesses communication skills and accounting experience, and training them to work effectively within your organization can be a significant time drain on your already overworked AP team.
Should You Expand Your Accounts Payable Team?
Is your accounts payable team struggling to handle their workload? Is the CFO breathing down your neck to get AP running more smoothly?
If your organization is growing rapidly, and your current AP staff is finding it difficult to keep up with the amount of invoices they are managing, you might decide that it is time to hire another person. However, you will have to take into account the additional cost of a salary (plus benefits for a full-time employee) as well as the time current employees will take on boarding the new employee. Once you’ve examined all these factors, it may be worth it to take a second look at your existing resources to see if they could be improved.
Hire or Optimize: Make the Right Choice for Your Organization
If the prospect of selecting and implementing a new AP solution seems too daunting given the upfront time and cost investment, it may seem easier to just hire a new person – even part time – to ease the workload. However, before you invest time and money in the hiring and training process (which can take weeks or more), ask yourself whether you really need another body, or if there is a way to optimize your existing processes.
Take some time to examine the positive impact an intelligent invoice management system can have on your accounts payable department, all without changing existing processes. The key is to improve the communication in every aspect of the approvals in a way that allows AP to retain full control. There’s no upfront time or monetary investment required, so it won’t be long before you will see the true potential of your AP team. Instead, they will enjoy greater job satisfaction and productivity thanks to improved communication and faster approvals.