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What is accounts payable?
Taxes and Accounting

What is accounts payable?

11 min read

Accounts payable (AP) is the money your company owes to its vendors or creditors. Your company’s AP department or finance team manages all the financial obligations of your business, including rent, unpaid invoices, and employee reimbursements

Since accounts payable touches each dollar that leaves your business, it’s critical to understand exactly what accounts payable is, how it works, and how it’s impacting your business operations.

What is accounts payable?

Accounts payable is the categorization of any amount owed by your company. On your company’s balance sheet, accounts payable are indicated as current liabilities. Whether your company purchased inventory from a vendor on credit or needs to pay outstanding bills for fixed costs, accounts payable manages every debt or liability of the business. 

Every company incurs expenses through day-to-day operations and utilizes accounts payable categorizations to track and complete those expenses. 

Accounts payable vs. accounts receivable

Accounts payable = money the company owes

Accounts receivable = money owed to a company

In a small business, you may have a single finance team (or individual) who manages both accounts payable and accounts receivable. Larger businesses will separate the departments, such as an accounting department and an accounts payable department, as the accounts payable process grows more nuanced.

What is included in accounts payable?

You can think of  accounts payable as “the bills,” but it covers much more than that. Your accounts payable will usually involve some combination of the following four roles:

  • Travel expenses: arrangements for flights, hotels, taxis, per diem, etc. 
  • Internal finance: reimbursing employees for business expenses, distributing petty cash
  • Vendor payments: paying invoices and managing vendor information
  • Reducing costs: negotiating payment terms, finding ways to save or consolidate

The way that each company breaks down their accounts payable will vary depending on size and need.

Is accounts payable an asset?

Accounts payable is considered a liability, as they are financial claims against company assets.

Assets are things the company owns and can use for future income. Liability is what the company owes other parties. Therefore, accounts payable would fall under liabilities to be resolved, while accounts receivable would be an acquisition of assets.

Is accounts payable a debit or credit?

In accounting, debits and credits are equal opposites of items or services coming in and out of a business. Debits add to the value of the company, increasing assets. Credits are resources going out which increase liability. Accounts payable is generally a credit, as accounts payable are outstanding liabilities.

What is the accounts payable process?

Each company will need a carefully considered accounts payable process to increase visibility, decrease fraud, ensure on-time payments, and responsibly manage financial records. 

Typically the accounts payable process takes these steps: 

  1. Invoice received: Whether paper copies or electronically, the process begins with receiving unpaid invoices or bills for which you owe. Receiving documentation of the expense is key for recording. 
  2. Review: The accounts payable team will carefully review the received invoice, checking for vendor identification, itemized purchases, totals, and dates of issue and payment. Invoices should be compared to purchase orders when possible to ensure validity. 
  3. Approval: The purchase must be approved by accounts payable department managers, and the quantity, price, and use verified. Pre-approval may be acceptable for certain purchases, depending on your policies. 
  4. Record: The expense will be recorded in company books, with the invoice and related data being filed away for future reference. 
  5. Payment: Accounts payable will send payment electronically or via check with proper authorization and recording. All payments should be made on time—or early. 

The accounts payable process can seem tedious or repetitive when there are multiple authorizations and reviewing of information, but it’s necessary for security. As the gatekeepers of the company finances, your finance team needs to take special care with accounts payable to minimize cost and to prevent fraud.

Common problems with accounts payable

Your own company accounts payable process needs set guidelines and controls to help prevent the misuse of company funds or loss due to error. Here are a few of the most common issues that plague accounts payable—and how you can prevent them. 

Inaccurate invoices

Likely the most common issue you’ll encounter with accounts payable is inaccurate or incomplete invoices. It could be as simple as a transposed number ($560.00 instead of $650.00) or as extreme as listing the yearly total instead of the monthly installment. Human error can impact a large number of paid invoices, so it’s important to provide multiple steps in your process to verify the invoice and all related details to the expense. 

Missing invoices

Another common problem, especially for smaller businesses who may contract frequently with other smaller businesses, is the absence of necessary invoices. A handshake agreement needs a little more documentation, and losing paper invoices can cause late payments. Your accounts payable process needs to account for every expense incurred by the company, and you need a paper trail even when the transaction is complete. 

Fraudulent invoices

In some circumstances, a vendor invoice can be fabricated. Invoices may come from vendors you’ve used in the past for goods you never ordered, or for actual purchases—but the total has been inflated. The multiple inspection points along your accounts payable process should help catch fraudulent invoices before you pay them. 

Duplicate payments

The larger your team, the harder it can be to keep the accounts payable process clear. How do you know when a payment has already been made? Perhaps an invoice isn’t properly recorded and filed, leaving a well-intentioned accountant to submit payment on an invoice that was already complete. Or maybe you’ve already sent payment for goods and just need an invoice for paperwork—but when another accountant opens the invoice they pay it without understanding the background. A system of ownership, defined process stages, and team communication can prevent duplicate payments of invoices.

Automated accounts payable

By utilizing technology you can automate your accounts payable process and free up your finance teams to drop the tedious data work and focus on cash flow and growth. Automated expense platforms can track expenses, gather and complete invoices, pay bills, and seamlessly update budgets as your transactions occur. It saves on time—and human error. 

Your accounts payable is an indicator of the health and efficiency of your company, so it’s in your best interests to streamline and ironclad your process.

Divvy offers powerful, free software for accounts payable, expense reporting, and more. Tired of paying just to pay? Try Divvy.

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