What is accounts payable and how can you manage it effectively?

1 What is accounts payable?

Accounts payable is the amount of money that your business owes to other parties for goods or services that you have received but not paid for yet. Accounts payable is a liability, meaning that it reduces your net worth and creates an obligation to pay in the future. Accounts payable is usually recorded as a short-term liability, as it is expected to be paid within a year or less.

2 How to record accounts payable?

To record accounts payable, you need to use the accrual method of accounting, which means that you recognize expenses and revenues when they are incurred or earned, not when they are paid or received. For example, if you buy inventory from a supplier on credit, you record the purchase as an expense and increase your accounts payable by the same amount. When you pay the supplier, you reduce your accounts payable and your cash by the same amount. Recording accounts payable helps you track your expenses and liabilities accurately and match them with your revenues.

3 How to manage accounts payable?

Managing accounts payable effectively means paying bills on time, while optimizing cash flow and avoiding penalties, interest, or damaged relationships. To do this, you need a system that tracks and verifies invoices and bills from suppliers, vendors, and creditors. Additionally, you should prioritize payments based on due dates, discounts, and cash availability. Negotiate favorable terms with suppliers, vendors, and creditors for longer payment periods, lower interest rates, or early payment discounts. Lastly, monitor and reconcile your accounts payable balance with bank statements and the general ledger.

4 How to use software to automate accounts payable?

One way to simplify and streamline your accounts payable management is to use software that automates some of the tasks and processes involved. For example, you can use software that scans and captures your invoices and bills electronically and stores them in a cloud-based system. It can also match your invoices and bills with your purchase orders and receipts, while flagging any discrepancies or errors. Additionally, it can approve your invoices and bills based on predefined rules and workflows, sending them to the appropriate person or department for payment. Moreover, it can integrate with your accounting software and your bank account, generating reports and alerts on your accounts payable status and performance.

5 How to improve your accounts payable efficiency and accuracy?

To improve your accounts payable management, you should adopt best practices that can help reduce errors, delays, and costs. Establish clear and consistent policies and procedures for your accounts payable process, communicate them to your staff and suppliers, vendors, and creditors, and train your staff on how to handle invoices and bills correctly. Additionally, review and audit your accounts payable process regularly to identify any areas for improvement or optimization. Maintaining good relationships with suppliers, vendors, and creditors is also essential; resolve any issues or disputes promptly and professionally. Understanding what accounts payable is, how to record it, and how to manage it effectively can improve your financial health and business performance.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?