Understanding Accounting: Accounts Payable Function

The accounts payable function of accounting is an area that requires close monitoring and accurate record keeping, unless you ‘d like to pay for things you don’t receive. Everything that you purchase in the course of operating your business is termed an “account payable”.

How you choose to pay for that merchandise, may vary. Some small items are paid for as they are purchased, and listed in an area known as miscellaneous expense. Some of the more expensive pieces of equipment you’ll need in order to operate your business, will be set up as “long-term liabilities”, not as a true accounts payable.

The accounts payable that we are referring to in this article, are the items that you purchase in sufficient quantity to warrant a purchase order, an invoice, and a net due term on your account. Most often, your purchases that will go to an accounts payable area are the items you need to create your product or service. If you sell widgets, and the widgets are made from blodgets and blocks, you would purchase blodgets and blocks by the hundreds. These purchases would occur on a regular basis, on set intervals. When the items arrive, they are shipped with a pack list that will be checked, attached to a receiver, and sent to the accounting department for future payment. This is a true accounts payable item.

At some point during the process, you will receive an invoice from the manufacturer of the items, and it will detail what you were shipped on a particular day; all this should match the pack list and receiver you have in your accounts payable for that manufacturer. In a perfect world, it matches every time, in reality, it will only match maybe 65% of the time.

Noted somewhere on that invoice, will be the terms of payment. Some of the invoices you receive will say “Net 7” or “Net 30”; this simply means payment is due within 7 or 30 days. With the use of computerized recordkeeping, it is often quite easy to set up timers that alert you to an approaching payment due date, based on the Net due information on the invoice.

Once you have matched your invoice and receiver, you will generate a payment to that manufacturer that will reference the invoice, and quite often the receiver. All you need now are an envelope and a stamp.

One of the most important lessons to be absorbed here, is not only the balancing and checking of the receiver and invoice, but the timely processing of the invoice to a payment. Many times, poor record keeping and a lack of discipline in your bookkeeping records will allow for missed payment deadlines or lost invoices. This does not enhance your reputation with the vendor to whom you owe monies, nor does it help your position should you need to ask a favor of that vendor. Timely payments, correct payments, and accurate recordkeeping help you to establish a good relationship with a vendor, or supplier, and goodwill is one of the best friends you can have in the business world.

Categories Accounting

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