What are the different steps involved in accounts payable workflow?
Accounts payable is a critical part of any business’s financial health. It includes making sure that all bills are paid on time and correctly, as well as tracking expenses, managing vendor relationships, and preventing fraud. Unfortunately, too many companies fail to have an effective accounts payable workflow in place. This can lead to cash flow issues, late payments, and even audit penalties. To make sure your business stays compliant and financially healthy, it’s important to understand the different steps involved in an accounts payable workflow. In this article, we will explore these steps and provide tips for how to optimize your process.
Accounts Payable Defined
Accounts payable (AP) are defined as the amounts owed by a company to its suppliers shown as a liability on the company’s balance sheet. Accounts payable is the amount of money a company owes to its creditors for goods and services purchased on credit.
Credit purchases are made when a company buys goods or services and does not pay for them immediately. The buyer instead promises to pay the seller at a later date, usually within 30 days. The terms “accounts payable” and “credit purchases” can be used interchangeably.
When a company buys something on credit, it records an accounts payable liability. This means that the company now owes money to its supplier. Accounts payable is different from other types of liabilities, such as loans, because it represents short-term obligations that will be paid within one year.
The Accounts Payable Workflow Process
The first step in the accounts payable workflow process is to receive invoices from vendors. These invoices can be received electronically or by paper. Once the invoice is received, it needs to be entered into the accounting system.
The second step in the process is to match the invoices with any outstanding purchase orders. This ensures that the correct items were received and that there are no discrepancies.
The third step is to verify that the invoices are accurate. This includes checking for any errors in pricing, quantities, or dates.
The fourth step is to get approval from the appropriate manager before paying the invoices. This step is important to ensure that all invoices are legitimate and that there is enough money in the budget to cover them.
The fifth and final step is to pay the invoices. This can be done electronically or by check. After payment, the accounting system should be updated accordingly.
Steps in the Accounts Payable Workflow
Assuming that the business uses accrual accounting, the steps in the accounts payable workflow are as follows:
1. The business records a purchase on its books. This creates a liability for the amount owed to the supplier.
2. When the invoice from the supplier arrives, the business matches it to the original purchase record.
3. The business then enters the invoice into its accounts payable system.
4. When it is time to pay the supplier, the business writes a check or conducts an electronic funds transfer for the amount due.
5. The business records a payment on its books, which reduces the liability owed to the supplier
Conclusion
Accounts payable workflow is an important process for businesses of all sizes. By following the steps outlined in this article, companies can ensure that their accounts payable processes are efficient and organized. From creating invoices to reconciling payments, understanding how each step of the accounts payable workflow works will help your business keep track of its finances and stay on top of any financial discrepancies. With proper tracking, management, and reconciliation procedures in place, you can rest assured that your company’s AP department runs smoothly and effectively.