Accounting for accounts payable
/What is Accounts Payable?
Accounts payable is the aggregate amount of an organization’s short-term obligations to pay suppliers for products and services that were purchased on credit. These obligations typically have a standard payment period, such as 30 days or 60 days from the invoice date. Some sellers offer an early payment discount, where the buyer can take a small discount if the invoice is paid within a few days of the invoice date.
How to Account for Accounts Payable
The accounting for accounts payable involves the recordation and payment of liabilities. This process only applies to purchases made on account. This is the primary functional area through which a business records expenses and pays other parties. The key accounts payable accounting tasks are noted below:
Invoice verification. The first step in accounting for accounts payable is to ensure that all incoming invoices from suppliers are valid. There are two ways to do so. One option is to have an authorized employee approve each invoice. The other option is to compare the information on each invoice to the authorizing purchase order and receiving documentation, which is called three-way matching. Since both options are labor-intensive, it is customary to not verify invoices having small dollar totals.
Invoice recordation. Once an invoice has been verified, the accountant enters the amount owed in the accounts payable software. The information entered includes the supplier name, invoice date, and invoice amount. The related accounting entry generated by the accounting software is always a credit to the accounts payable account. The offsetting debit may be either to an expense or asset account.
Invoice payment. When an invoice is due for payment, the accountant sets it up for payment through the accounting software. This typically means that a preliminary check register is run and reviewed to ensure that all items scheduled for payment should actually be paid. If so, check stock is loaded into a printer and checks are printed. Supporting information is attached to each check and then forwarded to a check signer, who reviews each packet of information for errors and then signs the checks. An alternative is to send electronic payments directly into the bank accounts of suppliers.
Invoice filing. Following payment, all payment information is stapled together and filed by supplier name. These documents are usually stored on the premises if they are dated within the past 12 months, and are moved off-site if they are older. The archived documents are eventually destroyed, once they reach the end of the retention period specified in the corporate document retention policy.
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Other Accounts Payable Activities
There are a number of additional tasks involved in the accounting for accounts payable, including the following:
Periodically reconcile the accounts payable account, to ensure that the account balance matches the actual amounts owed to suppliers.
Send 1099 forms to suppliers following the end of the calendar year, if aggregate payments to them exceed a threshold amount.
Contact suppliers to ensure that they have cashed all checks sent to them; otherwise, uncashed check amounts may have to be forwarded to a state government as unclaimed property.
Presentation of Accounts Payable
The total ending balance of accounts payable in the general ledger is presented as a liability line item in the balance sheet. If the payables are due for payment within one year (which is nearly always the case), then they are stated within the current liabilities section of the balance sheet. If not, they are stated within the long-term liabilities section instead.
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