5 Accounts Payable Basics You’re Forgetting

Procurement agents need to know three things when they start working in this industry: where their desk is, what time lunch starts and what the heck accounts payable (AP) is. Regarding the first two items, you’re on your own. But the last point is one that bears repeating to everyone from new employees to veteran managers.

Essentially, an AP is a liability to a creditor carried on an open account. In other words, it’s an unpaid balance, usually for the purchase of goods and services. Every time you order items from a supplier on credit, your company will incur a credit balance. That balance will remain until it’s totally paid off, which will result in that accounts payable being recorded with a zero balance.

Unless your company is cash-rich, you’re likely going to need to use accounts payable. Here are a few AP basics to help you use them properly and effectively.

1. Determining What AP Includes

Procurements qualify as an AP if they’re purchased on credit. They’re almost always used for items bought for the purposes of production and sales that are ordered in such a great quantity that a company can’t pay cash for them outright. There’s also a term limit for payment, usually in a series of instalments or net 30 if the supplier needs to be paid in 30 days.

Cash purchases don’t qualify as an AP, since there’s no credit involved. Instead of a purchase order, which is filled out for an AP transaction, you simply fork over the cash or cheque and receive the goods or services you need.

2. Differentiating Between AP & Expenses

two file folders red

One aspect of AP that may confuse workers is the difference between an AP and an expense. Both involve money leaving the business, but that’s where the similarities ends.

AP costs are those that have been incurred but not yet paid, since money is still owed to a supplier or creditor and is considered a liability. On a balance sheet, total liabilities are subtracted from assets (anything of value that is owned) to indicate the owner’s equity or what a business is worth.

On the other hand, expenses are costs that are already paid out and are related to revenue. These can be wages, a utilities bill or that client dinner your top salesperson charged the company for. On an income statement, expenses are deducted from revenue to indicate a net profit or loss.

3. Using Three-Way Matching to Check Accuracy

Here’s a basic safeguard you can use to check the accuracy of your AP transactions, but one that is often ignored by many companies because it’s labor intensive: three-way matching.

To identify whether a transaction was a cash purchase or a deal made on credit, only three documents are necessary: a purchase order, a shipping order and an invoice. The purchase order shows what your company bought on credit, the shipping order confirms that those items made it to the warehouse and the invoice reminds you to pay the creditor within a given time period.

These forms are all you need to use three-way matching, a process to confirm the accuracy of the transaction. If you have to perform scores of AP purchases daily, it’s a good idea to automate this process to reduce the time it takes.

4. Properly Filling Out Purchase Orders

purchase order form

Previous procurement practices only required the supplier’s address, the unit price of the items, the quantity and total cost to start the AP wheels rolling. Now, purchasing forms want you to fill in the blanks with inventory codes, shipping terms, taxes, additional shipping and handling charges, currency exchanges—the list goes on and on. It’s not surprising that some forms are submitted incomplete and inaccurately, especially when you’re racing to get everything done. Still, taking the time to understand and complete each and every field on that purchase order form will save you a lot of grief in the long run.

5. Understanding the Benefits of Automation

Attention old-school procurement agents! Yes, we know this might be intimidating, especially to those who have trouble just setting up their PVRs. Learning how to automate your AP workflow might involve some awkward first steps, but will definitely ensure faster and more accurate documentation once you’re up and running. It will even cover many of the points addressed in this piece, meaning you’ll realize the return on the investment in no time.

In the course of a heavy workday, it’s easy to take shortcuts or simply guess at what information you have to input while ignoring best practices. Though automation can eliminate the guesswork and keep your purchasing on schedule, that software can’t do all your thinking for you. Use these basics as the foundation of your procurement strategy so that you can always start off on the right foot.

Photos: Maglara / Shutterstock, Michael Kulesza, JohnKwan / Shutterstock