Accounts payable ledger contains a list of the company’s vendors with their balances payable. The ending balance of accounts payable is compared with the payable balance in the general ledger to ensure the accuracy of the payable record.
Accounts payable management is essential for the successful run of a business. This helps to ensure that it positively contributes to the working capital management of the company. Further, adequate monitoring helps to ensure avoidance of the penalty for late payment of the balances.
However, the business needs to balance between the financing needs of the company and terms with the suppliers. Suppose the business has a massive balance in the payable ledger. In that case, it means it’s not paying to suppliers on a timely basis which might impair the reputation of the business and signal that the business does not have better financial management. On the other hand, if the business does not have sufficient balance in the accounts payable ledger, it may not be taking advantage of a free funding source.
The accounts payable balance acts as a free source of finance for the company. However, you need to ensure that creditors are managed effectively and there is no impact on the business’s reputation. Further, if the business effectively handles payable management and develops trust with suppliers, they will be willing to offer better credit terms.
Further, if the business effectively manages payable management. It’s expected to have managed invoices, payment details, purchase orders, and other documents. So, it helps inadequate management of the record as well.
How accounts payable management work?
Accounts payable management is one of the essential processes in the successful run of the company. The importance of the process is often overlooked as it’s a back-end process. While in reality, there is a strong need to adequately manage and monitor the payable management process.
Different companies have different processes for accounts payable management. Companies tend to exercise internal controls to ensure a smooth run of the purchase process. So, we need to understand accounts payable management as part of the purchase cycle.
Chart of accounts
The process of payable management starts with the chart of accounts. There is a need to maintain a proper chart of accounts that have been coded appropriately. Adequate coding of the chart of accounts helps to ensure proper mapping of the financial statements and helps to ensure adequate management of payable balances.
Add Vendor details
Once the chart of accounts is finalized, there is a need to add vendor/supplier details in the accounting system. The details required include name, address, contact details, and details about tax. There is a need to implement strong internal controls to avoid the addition of ghost suppliers. The controls that can be applied include authorization and approval of the vendors.
Invoice details are added to the accounting system once received from the vendor. Details of the invoice like price and quantity need to be reconciled with the PO and GRN. Once the accuracy of details is ensured, it’s forwarded for posting.
This is the most critical part of accounts payable management. The payable department of the company needs to monitor payments maturing and that need to be paid.
This can be greatly helped by the preparation of the payable aging statement for the payable management. It helps to monitor that which balances are due and which balances are near to be due. It gives managers the ability to proactively manage the payments for suppliers in coordination with the finance department.
The aging statement provides names of the parties with due balance and the breakup of the invoices against which invoices have been accumulated. So, detailed and invoice-wise payments can be scheduled for effective management of the payable balances.
The facility of obtaining an aging report with few clicks is available within the automated accounting software. However, if you are using a manual accounting system, you may have to review individual invoices and prepare payable aging reports to determine the payment priority.
It’s important to note that if the purchasing department gets approval of buying some expensive item, especially PPE. They must get approval from the finance department as they need to ensure financing. As per best practice, the purchase and finance department must prepare and follow the budget. This helps to ensure the coordination of different departments.
As we understand, financing is a scarce resource, and there is a need to ensure adequate management of the payable balance and expectations of the suppliers. So, which parties should be paid, the amount and frequency of the payment should be decided by someone with authority, strong business understanding, and excellent negotiations skills.
Internal controls for accounts payable management
Following controls can be exercised in accounts payable management.
Obligation to pay
An obligation to pay can be verified with different documents like approved purchase orders, approved invoices, and performance of audit procedures to ensure a single invoice is not paid twice.
Data entry controls include a review of the documents as PO, Invoices, GRN, and any other documents of the purchase cycle. Reconciliation of quantity and amounts of these documents, and approval from the appropriate authority, etc.
Controls like segregation of duties, tracking and checking of the numbers, review of payment vouchers to ensure sufficient & appropriate audit evidence, and review of updates about payment information, etc.
What are the uses of the accounts payable ledger?
- Accounts payable ledger provides a quick summary of the account balances payable to the vendors and suppliers of the company.
- Accounts payable ledger greatly helps as control purpose. For instance, an account balance of the ledger can be reconciled with the general ledger. It gives an assurance that the balance of the accounts payable does not contain some material error.
- The accounts payable ledger can be used to produce an aging report of the payable balances. It means individual accounts balances that are due to be paid can be identified for appropriate action. In other words, it helps in managing the payment of the different creditors and other payables.
- It helps track all the details about specific account balances, including invoice date, order quantity, payable amount, vendor name, and invoice number, etc.
Frequently asked questions
What makes accounts payable a risky balance?
Accounts payable is related to the outflow of cash from the company. This brings a different risk that includes,
- Making a payment to the ghost suppliers.
- Paying for the services/products that were never received.
- Paying the same invoice twice.
- Making a payment to an inappropriate vendor.
- Intentional under/overstatement of profits for misrepresenting profit.
What is the impact of accounts payable management on the cash flow of the business?
Efficient accounts payable management leads to effective management of the cash. For instance, if the company has a huge pile-up of the balances to be paid, it might indicate the company is not paying on a timely basis. On the other hand, if the payable balance is very low, it might mean the company is not benefiting from the free source of funding.
Do we show a balance of accounts payable in the cash flow statement?
The balance of the accounts payable is not directly shown cash flow statement but in the balance sheet. However, changes in the accounts payable balance are shown in the cash flow statement (in-direct method).
What’s the difference between accounts payable and accounts receivables?
Accounts payable is what you have to pay to the creditors and other parties. It’s a liability in the financial statement of the company. Its settlement will lead to an outflow of economic benefits. On the other hand, accounts receivable is what you will receive from customers and other parties. Accounts receivables are an asset, and their settlement will lead to an inflow of economic benefits.
Which three factors are essential in payable management?
Three factors for the payable management include an obligation to pay exists, an appropriate bill is recorded, and an appropriate vendor is paid.