Accounts payable represents the current liabilities your business owes to third parties that you pay for goods and services purchased on credit, including debts. It's a critical part of the accounting cycle.
Here are a few examples of expenses you’d log under accounts payable:
- Materials purchased for the completion of a construction project or development of a product
- Equipment or technology purchased to produce goods or improve services
- Marketing, legal, and financial services
Typically, accounts payable concerns outstanding payments on credits and debt due within a short time frame, and that’s why we need to keep our books up-to-date; we want to pay what we owe on time.
Today, I’ll explain why accounts payable matters for your business and how to manage it efficiently and effectively.
It’s found on your balance sheet and cash flow statement.
Accounts payable are recorded on your balance sheet as current liabilities and will show a balance indicating the total amount of money you owe your suppliers for goods or services.
Changes in accounts payable will appear on your cash flow statement in the operating activities section. An increase in accounts payable suggests a temporary dip in cash flow, while a decrease signals an increase in available cash because you’ve settled debts with suppliers.
Accounts payable helps you manage cash flow.
Here’s why accounts payable is so important: it helps your small business manage its cash flow by scheduling cash payments while still getting the goods and services you need to maintain operations.
Instead of paying for everything upfront, you can wait until a later date and keep more cash on hand for other expenses. That means reliable access to liquidity and the capacity to invest in growth activities when timing is of the essence.
What is the difference between accounts payable and accounts receivable?
Accounts receivable is the money you’re owed for goods and services you have delivered but have not yet been paid for.
Let’s compare their contributions to your balance sheet.
Accounts receivable is the source of a balance sheet’s assets, whether they are tangible assets or intangible assets. Accounts payable is the source of a balance sheet’s liabilities.
Keep your accounts payable recording process consistent.
When your processes for accounts payable comply with GAAP accounting and reporting standards, that’s a sign you’re on the right track.
GAAP standards emphasize the need for consistency and precision in accounting, so if you follow those essential standards and principles, you’re going to pay what you owe on time and maintain strong relationships with suppliers.
Here are the five bookkeeping and accounting steps you should follow to prevent errors and inaccuracies in accounts payable.
Step #1: Capture invoices
Enter invoice information into your accounting system. Details should include date, vendor information, line items, amounts, and general ledger coding.
Step #2: Approve invoices
Review all of your supplier invoices. Consult with other team members who were involved in purchases, if necessary. You want to make sure there aren’t any errors before you move forward.
Step #3: Authorize payments
Confirm the accuracy of payment amount, method, and date. If you need formal approval, here is when you get it.
Step #4: Execute payments
Finally, process the payment. Whether that’s a check, ACH, wire, or credit card, make sure the invoice is paid and recorded in your system. You also generally want to include remittance details to the vendor along with payment.
Step #5: Reconcile accounts
I recommend monthly reconciliations between your accounts payable records and bank statements. Compare your vendor invoices with your accounts payable ledger and look for any discrepancies. You want to be sure all of your invoices are accounted for and payments are recorded correctly.
Be sure to keep accounts payable documentation.
Keep ledgers on the books for at least seven years. That’s the necessary timeframe to ensure compliance and keep you protected in the event that you’re audited.
Is your workflow efficient?
Every small business that does not work with a CPA will have some degree of inefficiency in their workflow, even with the help of automated software tools like QuickBooks Online.
Have your CPA take a look into your accounts payable process. It’s not simply about saving time; it’s about money management and cash flow.
When I said “take a look” in the paragraph above, I meant to say “professional setup.” Consultation is another word for advice, and because accounting is technical, workflow and process optimizations will need to be implemented by a professional.
If I were an electrician, and you were reading an article about faulty GFIs, I’d start with a general explanation of GFIs, then give you an estimate of the cost and time required to fix the issue.
Get into wall sockets; get electrocuted.
Get into the books; get stuck with interest and collections for late payments and risk damaging relationships with critical vendors. Then, there’s the possibility of litigation. Which is worse? If I were in any other area of business, I choose electrical shock. (These are worse-case scenarios: good to be aware of but unlikely to happen.)
Uncertainty is the enemy of productivity. Let’s replace it with confidence.
Schedule a call with me today for help with accounts payable issues, and we’ll talk about how we can align all your bookkeeping and accounting processes toward business performance and tax reduction.
Talk soon,
Jeremy A. Johnson, CPA
