Accounts payable are the expenses recognized on the liability side when purchases are made on credit. These are ongoing company expenses and are short-term debts to be paid within 1 year to avoid default.
Accounts payable is the total amount of short-term obligations or debt a company must pay its creditors for goods or services bought on credit. Accounts payable is the result of purchases made on credit.
Let’s take an example:
Davidson company made purchases worth USD 1 million on December 1 with 60 days payment terms. At the end of the current financial year, the company shall recognize USD 1 million as accounts payable.
Process flow of accounts payable
To understand how to reconcile accounts payable, the audit trail of accounts payable must be created. The following is the paper trail in the cycle of accounts payable:
- The buyer asks for supplier quotations along with payment terms and conditions.
- The buyer makes the purchases from suppliers on the account.
- The buyer receives the inventory/purchases.
- The buyer checks the purchases made for the quality he ordered and decides whether to accept the order in partial or full.
- The buyer makes purchases in return for purchases that are found to be defective.
- The buyer makes the payment in full.
- Any outstanding liability is carried forward to next year.
Withstanding the size and nature of the company, the objective of the company is to pay the company bills and invoices that are legitimate and accurate.
Why review accounts payable?
The company’s objective is to protect its cash and cash equivalents used to pay to accounts payable. Hence, the accounting system ought to have strong internal control systems to prevent paying fraudulent invoices, paying twice to vendors, and paying for inaccurate invoices.
Further, the accounts payable terms shall be accepted in such a way that it benefits the collection process of receivables and saves the cost money.
Reviewing accounts payable
The process flow of accounts payable helps depict what needs to be reviewed to get accurate accounts payable and a strong policy. Here are the accounting documents and aspects that need to be reviewed to check the accounts payable balance.
When the company wants to make the purchases, the first step is to make the purchase order quoting the number of materials required along with quality and other dimensions.
The purchase order will indicate a PO number, date prepared, company name, vendor name, name and phone number of a contact person, a description of the items being purchased, the quantity, unit prices, shipping method, date needed, and other pertinent information. It shall be reviewed in cross-matching which we discuss later on.
When the goods are received, the buyer records the inventory in receiving the report. After the receiving report and purchase order information are reconciled, they need to be compared to the vendor invoice. Hence, the receiving report is the second of the three documents in the cross-matching.
Later on or along with the inventory, the vendors send the invoice depicting the number of goods sent and the amount to be paid along with terms and conditions of payment.
This is the process to ensure that only valid and accurate invoices are recorded and paid. The cross-matching involves matching purchase order which states what has been ordered with receiving report mentioning what is received alongside the invoice which states what vendor billed the buyers.
After determining that the information reconciles, the vendor invoice can be entered into Accounts Payable’s liability account and reviewed properly.
The vendor confirmation is a periodical confirmation of balances at the end of the accounting period. It helps to ensure that balances as per our and vendors’ book matches.
When there is a difference, the reconciliation statement has to be made to mend what the accounts have been missing. These are generally year-end transactions that may have missed the recording.
Aging analysis of accounts payable
Historical aging analysis of payables helps the company. The payables shall be categorized based on outstanding up to 30 days, 60 days, and 90 days. The payables above 90 days are critical and need immediate attention.
The analysis of the aging payables report helps to perfectly put the company to have better negotiation in having accounts payable policy with the vendors.