Accounts Payables: What Is It And Why Is It Important?
In businesses, the acronym AP is vastly popular. So, what does AP mean in accounting terms? AP, or accounts payable, refers to an entry made in accounting that lists a good, service, or credit the business purchased that needs to be paid back in a short amount of time.
This entry makes its way on the company’s balance sheet as a current liability. Generally, businesses have an accounts payables department to look after the status of their payments. Keep reading to learn the background of this term and how it’s used in finance.
The Purpose Of Accounts Payables
The AP staff is responsible not only for clearing the impending bills but also performing several related chores. These include reconciling the invoices received, collecting and sorting payment receipts, recording transactions, and generating monthly and yearly financial reports.
Bigger companies prefer to keep the accounts payables and receivables departments segmented, but smaller companies may entrust the same department with both responsibilities.
The AP department is commonly responsible for the following aspects of a business.
Payments That Are Internal
It oversees the generation and distribution of tax returns and tax-exemption certificates, controlling petty cash and sorting reimbursement payments internally. Petty cash includes small, out-of-pocket expenses such as those incurred over office supplies or lunch.
To validate reimbursement requests, business employees must turn in log reports and receipts. Finally, the AP staff handles sales exemption certificates to ensure returns where they’re due.
Payments For Vendors
An important function of the accounts payables department is to cater to the business’s vendors. This includes managing their contact details, payment invoices, and organizing information related to the internal revenue service. The staff can choose to do this either manually or integrate itself with accounting software.
This department also caters to both orders that are pre-approved and those which have to be reconciled. AP generates monthly reports on the company’s financial standings, payments made, and the money it still owes.
Expenses For Business Travel
Business travels are a common arrangement among larger companies. There are companies whose nature of work entails regular trips. In such cases, the AP staff typically handles the incurred business expenses as well as travel arrangements. These can include making reservations for hotels and flights. AP will also be responsible for any reimbursements that result from trips that cost more than what was originally distributed.
Understanding accounts payables and how it relates to business management is crucial to financial success. Hence, you must acquaint yourself with some other miscellaneous responsibilities for the AP staff.
Staff often strategize ways to reduce costs and strengthen the company’s financial status. They do so by focusing on reward offers on timely payments. Through building a strong rapport with the supplying vendors, the AP department can score relaxed credit terms.
The Process For Accounts Payables
Vendor payments generally follow a set protocol. The process for accounts payables includes the following steps.
- Bill received: Quantity and quality of goods are traced through the bill received by the accounts payables department
- Bill review: The team must validate the bill and the details it includes, such as the vendor name, contact, invoice or bill number, and quantity listed
- Recording the transaction: As soon as the bill is received and reviewed, an expense entry takes its place in the ledger accounts. This is also the stage where the bill is forwarded for approval. Generally, the managerial authority reserves the right to grant authorization, but larger bills may require authorial intervention from the higher-order
- Ensuring payments within time: The AP department should ensure that payments are made either before or on the date specified in the bill. Also, they should collect receipts of payments and register these in their accounts. While making payments, the AP staff must corroborate key details such as the vendor name, account number, payment amount, the original bill issued, and so on.
The Bottom Line
Once you know what accounts payable is, it’s easy to estimate its relevance and significance in tracking an organization’s finances. The efficient management of your payables almost always ensures stronger cash flows and better overall performance for a business.