Accounts Payable

Accounts Payable Definition

Accounts payable or AP is an accounting term that describes money owed by a business to its creditors, also known as suppliers or vendors. Customarily, this function operates under the finance department of an organization to facilitate payments to various parts the organization owes to. On accounting balance sheets, AP is shown as a current liability.

Accounts payable are short term debts, or a form of credit that allows customers to pay for a product or service after it has been received. Amounts owed must be paid off within a time period determined by the supplier to avoid default. Payment terms may include a discount for cash payment or paying an invoice earlier than its due date.

Data from payables is recorded or reconciled in an accounting General Ledger at the time an invoice is vouched—or approved—for payment. Accountants or bookkeepers debit AP when a bill or invoice is owed, and credit AP when a bill or invoice is paid. As a result, a business can instantly determine what it owes vendors and short-term lenders by looking at the total debits in the accounts payable column.

Accounts Payable can also refer to a business department responsible for making payments owed to creditors on an organization’s behalf.

Best Practices

Accounts payable is a process that requires oversight and due diligence. Without it, errors occur and fraud can go unnoticed. Following AP best practices not only streamlines the process but reduces risk for the organization. Because the supply chain relies on consistent, predictable payments to continue their relationship with a business, the payables process must work to properly remit funds.

Accounts payable best practices include:

  • Maintain one clean vendor list
  • Require every vendor to have a W-9 on file prior to first payment
  • Have a clear methodology for processing invoices, including notes
  • Have a clear methodology for processing invoices, including notes
  • Have a transparent approval and disbursement system that involves more than one person (i.e. person entering the invoice should be different than the person approving the invoice or signing the check)
  • Conduct regular audits to identify overpayments, duplicates, rebates, pricing errors, contract noncompliance, sales tax errors, etc.
  • Consider technology to augment AP processes (accounts payable automation)
  • Directly tie payment approval activity with banking infrastructures

Datapoints

Account Payable Process

Accounts Payable process overview (Source: AP Overview)

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