Accounts payable (AP) is money owed by a business to its suppliers shown as a liability on a company's
balance sheet
In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a Partnersh ...
. It is distinct from
notes payable liabilities, which are debts created by formal
legal instrument
Legal instrument is a legal term of art that is used for any formally executed written document that can be formally attributed to its author, records and formally expresses a legally enforceable act, process, or contractual duty, obligation, or ...
documents. An accounts payable department's main responsibility is to process and review transactions between the company and its suppliers and to make sure that all outstanding invoices from their suppliers are approved, processed, and paid. Processing an invoice includes recording important data from the invoice and inputting it into the company's financial, or bookkeeping, system. After this is accomplished, the invoices must go through the company's respective business process in order to be paid.
Overview
An accounts payable is recorded in the Account Payable sub-ledger at the time an invoice is vouched for payment. Vouchered, or vouched, means that an invoice is approved for payment and has been recorded in the
General Ledger or AP subledger as an outstanding, or open, liability because it has not been paid. Payables are often categorized as Trade Payables, payables for the purchase of physical goods that are recorded in Inventory, and Expense Payables, payables for the purchase of goods or services that are expensed. Common examples of Expense Payables are advertising, travel, entertainment, office supplies and utilities. ''AP'' is a form of
credit
Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt) ...
that suppliers offer to their customers by allowing them to pay for a
product
Product may refer to:
Business
* Product (business), an item that serves as a solution to a specific consumer problem.
* Product (project management), a deliverable or set of deliverables that contribute to a business solution
Mathematics
* Produ ...
or
service after it has already been received. Suppliers offer various payment terms for an invoice. Payment terms may include the offer of a cash discount for paying an invoice within a defined number of days. For example, 2%,
Net 30
Net 10, net 15, net 30 and net 60 (often hyphenated "net-" and/or followed by "days", e.g., "net 10 days") are forms of trade credit which specify that the net amount (the total outstanding on the invoice) is expected to be paid in full by the b ...
terms mean that the payer will deduct 2% from the invoice if payment is made within 30 days. If the payment is made on Day 31 then the full amount is paid. This is also referred to as 2/10 Net 30.
In
household
A household consists of two or more persons who live in the same dwelling. It may be of a single family or another type of person group. The household is the basic unit of analysis in many social, microeconomic and government models, and is i ...
s, accounts payable are ordinarily bills from the
electric company,
telephone
A telephone is a telecommunications device that permits two or more users to conduct a conversation when they are too far apart to be easily heard directly. A telephone converts sound, typically and most efficiently the human voice, into e ...
company,
cable television
Cable television is a system of delivering television programming to consumers via radio frequency (RF) signals transmitted through coaxial cables, or in more recent systems, light pulses through fibre-optic cables. This contrasts with broa ...
or
satellite dish service,
newspaper
A newspaper is a periodical publication containing written information about current events and is often typed in black ink with a white or gray background.
Newspapers can cover a wide variety of fields such as politics, business, sports a ...
subscription, and other such regular services. Householders usually track and pay on a monthly basis by hand using cheques, credit cards or internet banking. In a business, there is usually a much broader range of services in the AP file, and
accountants or
bookkeepers usually use
accounting software to track the flow of money into this
liability account when they receive invoices and out of it when they make payments. Increasingly, large firms are using specialized Accounts Payable automation solutions (commonly called ePayables) to automate the paper and manual elements of processing an organization's invoices.
Commonly, a supplier will ship a product, issue an invoice, and collect payment later. This is a
cash conversion cycle, or a period of time during which the supplier has already paid for raw materials but hasn't been paid in return by the final customer.
When the invoice is received by the purchaser, it is matched to the
packing slip
A receipt (also known as a packing list, packing slip, packaging slip, (delivery) docket, shipping list, delivery list, bill of the parcel, manifest, or customer receipt) is a document acknowledging that a person has received money or proper ...
and
purchase order
A purchase order is a commercial document and first official offer issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services. It is used to control the purchasing of products and services from externa ...
, and if all is in order, the invoice is paid. This is referred to as the three-way match. The three-way match can slow down the payment process, so the method may be modified. For example, three-way matching may be limited solely to large-value invoices, or the matching is automatically approved if the received quantity is within a certain percentage of the amount authorized in the purchase order. Invoice processing automation software handles the matching process differently depending upon the business rules put in place during the creation of the
workflow
A workflow consists of an orchestrated and repeatable pattern of activity, enabled by the systematic organization of resources into processes that transform materials, provide services, or process information. It can be depicted as a sequence o ...
process. The simplest case is the two way matching between the invoice itself and the purchase order.
Estimates from 2009 suggested that more than a billion business-to-business invoices were being processed each week, and 97% of these were still processed manually. The average cost to process and pay a supplier invoice was between $5 and $15, with 10% processed too late to be paid within discounting terms, and nearly 2% containing errors.
Internal controls
A variety of checks against abuse are usually present to prevent
embezzlement by accounts payable personnel.
Separation of duties
Separation of duties (SoD), also known as segregation of duties is the concept of having more than one person required to complete a task. It is an administrative control used by organisations to prevent fraud, sabotage, theft, misuse of informati ...
is a common control. In countries where cheques payment are common nearly all companies have a junior employee process and print a cheque and a senior employee review and sign the cheque. Often, the accounting software will limit each employee to performing only the functions assigned to them, so that there is no way any one employee – even the
controller
Controller may refer to:
Occupations
* Controller or financial controller, or in government accounting comptroller, a senior accounting position
* Controller, someone who performs agent handling in espionage
* Air traffic controller, a person ...
– can singlehandedly make a payment.
Some companies also separate the functions of adding new vendors to the master vendor file and entering vouchers. This makes it impossible for an employee to add themselves as a vendor and then write a cheque to themselves without colluding with another employee. The master vendor file is the repository of all significant information about the company's suppliers. It is the reference point for accounts payable when it comes to paying invoices.
In addition, most companies require a second signature on cheques whose amount exceeds a specified threshold.
Accounts payable personnel must watch for fraudulent invoices. In the absence of a
purchase order
A purchase order is a commercial document and first official offer issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services. It is used to control the purchasing of products and services from externa ...
system, the first line of defense is the approving manager. However, AP staff should become familiar with a few common problems, such as "
Yellow Pages
The yellow pages are telephone directories of businesses, organized by category rather than alphabetically by business name, in which advertising is sold. The directories were originally printed on yellow paper, as opposed to white pages for ...
"
ripoff
A ripoff (or rip-off) is an unfavorable financial transaction. Usually it refers to an incident in which a person is overcharged for something, or receives goods or services not of the standard expected for the price. A ripoff is usually disting ...
s in which fraudulent operators offer to place an advertisement. The walking-fingers logo has never been trademarked, and there are many different Yellow Pages-style directories, most of which have a small distribution. According to an article in the Winter 2000
American Payroll Association
The American Payroll Association (APA) is a professional association for individuals responsible for processing company payrolls. The Association conducts payroll training courses and seminars on a yearly basis and publishes a library of payroll r ...
's ''Employer Practices'', "Vendors may send documents that look like invoices but in small print they state "this is not a bill". These may be charges for directory listings or advertisements. Recently, some companies have begun sending what appears to be a rebate or refund check; in reality, it is a registration for services that is activated when the document is returned with a signature."
In accounts payable, a simple mistake can cause a large overpayment. A common example involves duplicate invoices. An invoice may be temporarily misplaced or still in the approval status when the vendors calls to inquire into its payment status. After the AP staff member looks it up and finds it has not been paid, the vendor sends a duplicate invoice; meanwhile the original invoice shows up and gets paid. Then the duplicate invoice arrives and inadvertently gets paid as well, perhaps under a slightly different invoice.
Audits of accounts payable
Auditors often focus on the existence of approved invoices, expense reports, and other supporting documentation to support checks that were cut. The presence of a confirmation or statement from the supplier is reasonable proof of the existence of the account. It is not uncommon for some of this documentation to be lost or misfiled by the time the audit rolls around. An auditor may decide to expand the sample size in such situations.
Auditors typically prepare an aging structure of accounts payable for a better understanding of outstanding debts over certain periods (30, 60, 90 days, etc.). Such structures are helpful in the correct presentation of the balance sheet as of fiscal year end.
Automation
Many companies are involved in work to streamline or automate the business process of their accounts payable departments. This process is straightforward but can become very cumbersome, especially if the company has a very large number of invoices. This problem is compounded when invoices that require processing are on paper. This can lead to lost invoices,
human error
Human error refers to something having been done that was " not intended by the actor; not desired by a set of rules or an external observer; or that led the task or system outside its acceptable limits".Senders, J.W. and Moray, N.P. (1991) Human ...
during data entry, and invoice duplicates. These and other problems lead to a high cost per invoice metric. The goal of automating the accounts payable department is to streamline this invoicing process, eliminate potential human error, and lower the cost per invoice.
[The Aberdeen Group: Scott Pezza, w. j. (2010, October). The E-payables Solution Selection Report: A Buyer's Guide to Accounts Payable optimization, page 4. Retrieved from www.adp.com: ]
Some of the most common AP automation solutions include
e-invoicing, scanning of documents,
optical character recognition
Optical character recognition or optical character reader (OCR) is the electronic or mechanical conversion of images of typed, handwritten or printed text into machine-encoded text, whether from a scanned document, a photo of a document, a sc ...
, automation of workflow rules, online tracking, reporting capabilities, electronic invoice user interfaces, supplier networks, payment services and spend analytics for all invoices.
Effective automation functions include freeform recognition (ability to interpret invoice documents regardless of layout or the need to create a supplier template) and automatic learning capabilities.
Electronic Invoicing
Electronic invoicing (also called e-invoicing or einvoicing) is a form of electronic billing. E-invoicing methods are used by trading partners, such as customers and their suppliers, to present and monitor transactional documents between one anoth ...
can be a very useful tool for the AP department. Electronic invoicing allows vendors to submit invoices over the internet and have those invoices automatically routed and processed. Because invoice arrival and presentation is almost immediate invoices are paid sooner; therefore, the amount of time and money it takes to process these invoices is greatly reduced. (Financial Operations Networks, 2008) These solutions usually involve a third-party company that provides and supports an application which allows a supplier to submit an electronic invoice to their customer for immediate routing, approval, and payment. These applications are tied to databases which archive transaction information between trading partners. (US Bank, Scott Hesse, 2010) The invoices may be submitted in a number of ways, including
EDI,
CSV, or
XML
Extensible Markup Language (XML) is a markup language and file format for storing, transmitting, and reconstructing arbitrary data. It defines a set of rules for encoding documents in a format that is both human-readable and machine-readable ...
uploads, PDF files, or online invoice templates. Because E-invoicing includes so many different technologies and entry options, it is an umbrella category for any method by which an invoice is electronically presented to a customer for payment.
Enterprise resource planning
Enterprise resource planning (ERP) is the integrated management of main business processes, often in real time and mediated by software and technology. ERP is usually referred to as a category of Business management tools, business management ...
systems typically use software to provide integrated business process management services to enterprises.
History
Since the mid-1967s companies have begun to establish data links between their trading partners to transfer documents, such as invoices and purchase orders. Inspired by the idea of a paperless office and more reliable transfer of data, they developed the first
EDI systems. These systems were unique to the respective company that developed them, meaning they were difficult to deploy across a large number of corporations. Recognizing this, the
Accredited Standards Committee X12—a standards institution under the umbrella of ANSI—made preparations to standardize EDI processes. This resulted in what is known today as the
ANSI X12 EDI standard.
This remained the main way to exchange transactional data between trading partners for nearly 3 decades. The 1990s came with advances in internet technology. Companies began to appear offering more robust user interface web applications with functions that catered to both supplier and customer. These new web-based applications allowed for online submission of individual invoices as well as EDI file uploads. Along with other methods of file uploads including CSV and XML. These services allow suppliers to present invoices to their customers for matching and approval via a user-friendly web application. Suppliers can also see a history of all the invoices they submitted to their customer without having direct access to the customers' systems. This is because all the transactional information is stored in the data centers of the third-party company that provides the invoicing web app. This proprietary information can be regulated by the customer in order to control how much transactional information the vendor is allowed to see. (For example, payment dates, or check information).
As companies advance into the digital era, more and more are switching to electronic invoicing services to automate their accounts payable departments. Some even believe it to be an industry standard in the near future. According to a report done by the GXS team in 2013, Europe is adopting government legislation encouraging businesses to adopt electronic invoicing practices. The United States has no such legislation yet but does recognize the value of this technology. The US Treasury estimated that implementing e-invoicing across the entire federal government would reduce cost by 50% and save $450 million annually.
With the increasing availability of robotic solutions, businesses are driving process improvement in AP even further. By applying end-to-end
robotic process automation
Robotic process automation (RPA) is a form of business process automation technology based on metaphorical software robots (bots) or on artificial intelligence (AI)/digital workers. It is sometimes referred to as ''software robotics'' (not to be ...
or RPA to their accounts payable department, organizations can accelerate invoice processing speed and accuracy while improving operational costs. Some organizations report that by implementing RPA they have managed to almost eliminate human intervention from the AP process, thus saving 65% to 75% of the time that was previously had spent on manual processing.
See also
*
List of accounting topics
This page is an index of accounting topics.
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A
Accounting ethics - Accounting information system - Accounting research - Activity-Based Costing ...
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Accounts receivable
Accounts receivable, abbreviated as AR or A/R, are legally enforceable claims for payment held by a business for goods supplied or services rendered that customers have ordered but not paid for. These are generally in the form of invoices raised ...
*
Payroll
A payroll is the list of employees of some company that is entitled to receive payments as well as other work benefits and the amounts that each should receive. Along with the amounts that each employee should receive for time worked or tasks pe ...
*
Invoice reader
Invoice Processing : involves the handling of incoming invoices from arrival to payment. Invoices have many variations and types. In general, invoices are grouped into two types:
1. Invoices associated with a company's internal request or purchase ...
*
Creditor Reference The Creditor Reference (also called the Structured Creditor Reference) is an international business standard based on ISO 11649, implemented at the end of 2008.
Using Creditor Reference, a company can automatically match its remittance information ...
References
{{Authority control
Accounting terminology
Liability (financial accounting)
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