– Account Payable Process

Below is the complete Accounts Payable process:

1. Issue the purchase order:

The AP process begins with the issuance of a purchase order to the supplier. The purchase order specifies what you intend to buy, the brand and the quality of the goods. In some cases, it also specifies the agreed quantity and the price.

2. Receive goods:

Based on the purchase order, the supplier will ship a product. Until the goods have been received by the customer, title generally remains with the supplier. Once the goods have been received on your arrival, you become the owner of the goods.

3. Inspect the goods:

Most organizations have internal control processes to inspect goods to ensure the quantity and quality of material supplied.

4. Enter the invoice:

The supplier issues a credit note and collects the payment later. This describes a cash conversion cycle, a period of time during which the supplier has already paid for the raw materials but has not been paid back by the end customer. The invoice received is recorded in the customer’s books.

5. Matching Purchase Orders and Matching Receipts:

When the invoice is received by the buyer, it is reconciled with the delivery note and the purchase order, and if everything is in order, the invoice is paid. This is called the match three. Triple-matching can slow down the payment process, so triple-matching can be limited to high-value invoices, or matching is automatically approved if the quantity received is within a certain percentage of the amount authorized in the purchase order.

6. Unblock and make payment:

Once the reconciliation is done and the Accounts Payable department is satisfied with the accuracy and validity of the purchase, they refer to the terms of payment. Companies may have negotiated different payment terms with different suppliers. Payment is made according to the agreed payment terms and the amount is released to the supplier.

7. Bank reconciliation:

Generally, payment is made through the bank. There is a slight delay between the date the payment is released and the date it reaches the supplier’s account. The bank transaction is reconciled to the original payment entry in the payment register to reconcile the two accounts, which completes the vendor account process.

In the next video tutorial we will explain the accounting entries in the payment process.

Below are some other activities that occur during the AP processing cycle:

  1. Define and maintain vendor information for use at invoicing and payment
  2. Enter billing information
  3. Match invoices to purchase orders
  4. Define, enter and import employee expense reports, as expenses are also part of payables to employees
  5. Set up bank accounts for payment to vendors
  6. Capture manual payments or use EDI to make automated payments
  7. Pay the bills
  8. Stop and reverse payments in case holdbacks are needed
  9. Enter and apply deposits on invoices, adjust advances
  10. Enter and apply advances to employees
  11. Create recurring invoices for the same type of invoices
  12. Transfer invoices and payment details to general ledger to ensure proper accounting
  13. Before any ERP system works, you may need to set default tax rules and principles