Accounts Payable (AP) is a crucial financial process that enables companies to manage their invoices and payments to vendors and suppliers for the goods and services received.
The AP process ensures that invoices are verified, approved, recorded, and paid promptly to maintain good vendor relationships and avoid late payment fees.
This article will cover the key processes of Accounts Payable, including purchase orders, goods received notes, invoices, verification, approval, recording, and payment.
Purchase Order
A purchase order (PO) is a document issued by a company to a vendor or supplier that outlines the details of the goods or services the company wishes to purchase.
The purpose of a purchase order is to provide a formal agreement between the company and the vendor that sets out the terms and conditions of the transaction.
The purchase order typically includes the following details:
- Purchase order number: A unique identifier for the transaction.
- Vendor information: Name, address, and contact details of the vendor.
- Shipping Information: Delivery address and delivery date.
- Product or service information: Description of the goods or services, quantity, price, and any applicable taxes.
- Payment terms: Details of the payment terms and conditions, such as the payment due date, payment method, and currency.
A purchase order is important because it helps to ensure that the company receives the correct goods or services at the agreed price and on the agreed date.
It also helps to prevent disputes and misunderstandings between the company and the vendor.
Goods Received Note
Goods received note (GRN) is a document used to confirm that the goods or services ordered by the company have been received from the vendor.
The purpose of a GRN is to provide proof of delivery and to enable the company to check that the goods or services received match the details of the purchase order.
The goods received note typically includes the following details:
- GRN number: A unique identifier for the goods received in the note.
- Purchase order number: The purchase order number to which the goods or services related.
- Vendor information: Name, address, and contact details of the vendor.
- Shipping information: Delivery address and delivery date.
- Product or service information: The goods or services received, quantity, and discrepancies.
- Signature: A signature from the person who received the goods or services.
A goods received note is important because it enables the company to verify that the goods or services received match the details of the purchase order.
Any discrepancies can be noted on the GRN and resolved before the invoice is processed.
Receiving Invoices
Once the goods or services have been received, the vendor will send an invoice to the company for payment. The invoice includes details of the goods or services received, the price, and any applicable taxes.
Receiving invoices involves checking the details of the invoice against the details of the purchase order and the goods received note.
This process is important because it helps ensure that the company is charged the correct amount for the goods or services received.
The invoice typically includes the following details:
- Invoice number: A unique identifier for the invoice.
- Vendor information: Name, address, and contact details of the vendor.
- Shipping Information: Delivery address and delivery date.
- Product or service information: Description of the goods or services received, quantity, price, and any applicable taxes.
- Purchase order number: The purchase order number to which the invoice relates.
- Goods received note number: The goods received note number to which the invoice relates.
Once the invoice has been received, it is verified, approved, and recorded in the company’s accounting system. Payment is then made within the agreed payment terms.
Verification
Verification is an essential part of the accounts payable process that involves checking the details of the invoice against the details of the purchase order and the goods received in the note.
Verification ensures that the invoice is accurate and that the company is being charged the correct amount for the goods or services received.
Verification typically involves checking the following:
- Quantity: The quantity of goods or services received matches the quantity on the purchase order, and the goods received the note.
- Price: The price of the goods or services received matches the price on the purchase order and the goods received note.
- Taxes: Any applicable taxes have been correctly calculated and charged.
- Other charges: Any other charges, such as shipping or handling fees, have been correctly calculated and charged.
If there are any discrepancies between the details on the invoice, purchase order, and goods received in the note, the discrepancy must be resolved before the invoice is approved for payment.
Approval
Approval is the process of authorizing payment for the invoice after verifying it.
The purpose of approval is to ensure that payment is made only for invoices verified and approved by authorized personnel.
Approval typically involves the following steps:
- Review the invoice details to ensure that it has been correctly verified.
- Checking that the payment terms and conditions follow the company’s policies and procedures.
- Authorizing payment for the invoice by signing it or approving it through the company’s electronic payment system.
Approval ensures that the company only pays for legitimate and accurate invoices.
Recording
Recording is entering the verified and approved invoice details into the company’s accounting system.
The purpose of recording is to ensure that the company’s financial records accurately reflect the transactions that have taken place.
Recording typically involves the following steps:
- Entering the invoice details into the company’s accounting system, such as the invoice number, vendor name, amount, and payment date.
- Assigning the expense to the appropriate account in the company’s chart of accounts.
- Creating a journal entry to record the transaction in the company’s general ledger.
Recording ensures that the company’s financial records are accurate and up-to-date.
Payment
Payment is the final step in the accounts payable process and involves transferring funds to the vendor in exchange for the goods or services received.
The purpose of payment is to fulfill the company’s obligation to pay for the goods or services received.
Payment typically involves the following steps:
- Initiating the payment through the company’s electronic payment system or by issuing a check.
- Sending the payment to the vendor through the appropriate channels, such as a bank transfer or mail.
- Recording the payment in the company’s accounting system.
Payment ensures the company fulfills its financial obligations and maintains good vendor relationships.
Conclusion
Accounts Payable is a critical financial process that enables companies to manage their invoices and payments to suppliers and vendors. The key processes of Accounts Payable include purchase orders, goods received notes, receiving invoices, verification, approval, recording, and payment.
By following these processes, companies can maintain good relationships with their suppliers and vendors, avoid late payment fees, and ensure the accuracy of their financial records.
