ACCOUNTS PAYABLE GUIDE SIMPLIFIED! (+ Detailed formula breakdown)

Account Payable

Hardly do we find companies or businesses in this century which are free from debt or which have not in one time or the other owed a debt. As a businessman, you most likely would find yourself in such a position; congratulations, this article gives you an overview of how to handle your Accounts Payable (process, functions, journal entry with examples for easy learning).

What is Account Payable?

Account payable is money owed by a business to its suppliers shown as a liability on a company’s balance sheet. Also, It is different from note payable liabilities, which are debts created by formal legal instrument documents.

Account Payable Function

The Account payable department carry out these functions:

#1. Firstly, processing and paying approved vendor invoices.

#2. Secondly, obtaining W-9 or other tax identification information from suppliers.

#3. Also, processing and paying valid and approved business travel reimbursements or small expense reimbursements not charged on a business P-card) to employees.

#4. Furthermore, preparing financial reports related to accounts payable. 

The above are some Account Payable Functions.

Account Payable Examples

#1. Raw Materials/Power/ Fuel Purchase.

#2. Transportation and Logistics.

#3. Assembling and Subcontracting Works.

#4. Also, traveling.

#5. Furthermore, equipment.

#6. In addition, leasing.

#7. Lastly, licensing.

The above are Examples of Account Payable

Account Payable Job Description

Payable Clerk duties include:

#1. Firstly, processing accounts and incoming payments in compliance with financial policies and procedures.

#2. Also, performing day-to-day financial transactions, including verifying, classifying, computing, posting, and recording accounts receivables’ data.

#3. Lastly, preparing bills, invoices and bank deposits.

Account Payable Jobs

Below are some listed jobs

#1. Payable Manager

Thermo Fisher Franklin, MA, USA. Thermo Fisher Scientific Jobs full–time.

#2. Payable Specialist

Uline Chicago, IL, USA.

Glassdoor, full–time.

#3. Lead Accounts Payable Clerk

Robert Half Deer field Beach, FL, USA.

Robert Half $45K– $60K a year full–time.

#4. Payable Specialist.

Randstad US, South Windsor, CT, USA.

Glass door full–time.

#5. Accountant – Payable

Chatham University Pittsburgh, PA, USA.

Inside Higher Ed Careers Over, full–time.

#6. Payable Analyst .

UC Health Aurora, CO, USA.

UC Health full–time.

#7. Accountant.

Collabera Austin, TX, United States. Collabera Contractor.

#8. Supervisor Payable.

Constant Contact, Endurance Group.

Waltham, MA, USA. Endurance Group Jobs, full–time.

#9. Accounts Specialist .

Pride Staff Financial Alpharetta, GA, USA.

Pride Staff Financial Jobs.

#10. Global Payables.

Operations Center of Excellence (COE) Leader Baker Hughes Houston, TX, USA.

Baker Hughes full–time.

Account Payable Formula

#1. Firstly, accountants have to divide the total purchases by the average accounts payable for the year to get the turnover. 

The next sub topic shows you the Payable Process.

Account Payable Process

The full cycle of the Account Payable process includes invoice data capture. Also, it involves coding invoices with correct account, approving invoices, matching invoices to purchase orders, and posting for payments. Basically, the Account Payable process is only one part of what is known as procure to pay.

#1. Receiving the bill

Basically, while dealing in goods, the bill/invoice helps in tracing the number/quantity of goods received. Therefore, the time for which the bill is valid can also be known when the bill is received on time.

#2. Scrutinizing the bill for details

Also, the vendor’s name, authorizations, date, and requirements raised with the vendor based on the purchase order can be verified too.

#3. Updating the records for the bills received

In addition, ledger accounts connected to the bills received need to be updated. Therefore, an expense entry is usually required to be made in the books of accounts. Also, in cases when accounting software is used, recording some expenses may require managerial approval. The approval will be based on the bill value.

#4. Making timely payment

Furthermore, as and when the due dates arrive (based on a mutual understanding with the vendor/creditor), the payments need to be processed. Meanwhile, the documents required here need to be prepared and verified. Details entered on the cheque, vendors’ bank account details, payment vouchers, the original bill, purchase order, etc., need to be scrutinized. Also, the signature of the authorized person may be required.

Therefore, once the payments are made, the vendors/creditors ledger account has to be closed in the books of accounts. Hence, this will reduce the liability earlier created. In simpler words, the amount showed as payable, will no longer be seen as a liability.

If you’re used to managing your own personal bills, you should have no problem transitioning to the accounts payable process.

However, there are other things you need to do in order to prepare and process accounts payable properly for example.

# 1. Ensure you pay for any invoices due

Go through your accounts payable weekly to know what payments are due. Basically, you can use a manual accounting system or accounting software, you’ll need to review due dates to see which invoices need to be paid.

#2. Create your chart of accounts

one of the most important things you’ll need to do before you begin to process accounts payable is to createe a chart of accounts that works with your business. Basically, our chart of accounts is where all of your accounting transactions (including Accounts payable) should be.

#3. Set up suppliers details

Basically, if you are tracking accounting transactions using accounting software, you’ll need to record suppliers’ details.

#4. Ensure that the details of the bills are accurate

Importantly, Accountants need to ensure that the bill received from suppliers are accurate.

Therefore, if a bill is for goods ordered, ensure that the goods listed in the invoice have all been received. Also, if the invoice is for services rendered, ensure the services were provided as described on the invoice. It’s important to complete this process for any invoice received.

Once this is complete, you can begin the process of entering the invoice information, either in your ledger accounts or in your software application. Also, if you enter all accounts payable for your business, you can approve bills as you examine them.

However, if you employ a clerk, you’ll need to provide that person with general guidelines on invoice approval, as well as perhaps a dollar limit the clerk can approve themselves.

In our next subheading, we show you a quick way to distinguish between Payable and receivables.

Account Payable vs Receivable

As explained earlier, receivables are the amounts owed to a company by its customers, while payables are the amounts that a company owes to its suppliers. However, both are compared to see if there are enough funds from receivables to pay for the outstanding payables. This comparison is most commonly made with the current ratio, though the quick ratio may also be used.

Other differences between receivable and payable are as follows:

#1. Receivables are classified as a current asset, while payables are classified as a current liability

#2. Also, payables have no such offset while receivables may be offset by an allowance for doubtful account

#3. In addition, receivables usually only involve a single trade receivable account and a non-trade receivables account, while payables can be comprised of many more, including trade payables, sales tax payables, income tax payables, and interest payables.

Lets consider an Account Payable Journal Entry below

Account Payable Journal Entry

Date Particular Debit Credit
6 Mar 20 Purchases Account $6000
To Payable $6000
(Being Inventory purchased on credit).
Date Particular Debit Credit
20 Mar Payable $6000
To cash Account $6000
(Cash paid to the suppliers for inventory purchased on 6 Mar 2020).
The table above is an example of Account Payable Journal Entry

Conclusion

With this information, I believe you have learnt a lot with respect to handling the Account payable of your business.

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