الثلاثاء، 13 يناير 2015

Accounts Payable part1

Introduction to Accounts Payable

Account payable is defined in Webster's New Universal Unabridged Dictionary as:
account payablepl. accounts payable. a liability to a creditor, carried on open account, usually for purchases of goods and services. [1935-40]
When a company orders and receives goods (or services) in advance of paying for them, we say that the company is purchasing the goods on account or on credit. The supplier (or vendor) of the goods on credit is also referred to as a creditor. If the company receiving the goods does not sign a promissory note, the vendor's bill or invoice will be recorded by the company in its liability account Accounts Payable (or Trade Payables).
As is expected for a liability account, Accounts Payable will normally have a credit balance. Hence, when a vendor invoice is recorded, Accounts Payable will be credited and another account must be debited (as required by double-entry accounting). When an account payable is paid, Accounts Payable will be debited and Cash will be credited. Therefore, the credit balance in Accounts Payable should be equal to the amount of vendor invoices that have been recorded but have not yet been paid.
Under the accrual method of accounting, the company receiving goods or services on credit must report the liability no later than the date they were received. The same date is used to record the debit entry to an expense or asset account as appropriate. Hence, accountants say that under the accrual method of accounting expenses are reported when they are incurred (not when they are paid).
The term accounts payable can also refer to the person or staff that processes vendor invoices and pays the company's bills. That's why a supplier who hasn't received payment from a customer will phone and ask to speak with "accounts payable."
The accounts payable process involves reviewing an enormous amount of detail to ensure that only legitimate and accurate amounts are entered in the accounting system. Much of the information that needs to be reviewed will be found in the following documents:
  • purchase orders issued by the company
  • receiving reports issued by the company
  • invoices from the company's vendors
  • contracts and other agreements
The accuracy and completeness of a company's financial statements are dependent on the accounts payable process. A well-run accounts payable process will include:
  • the timely processing of accurate and legitimate vendor invoices,
  • accurate recording in the appropriate general ledger accounts, and
  • the accrual of obligations and expenses that have not yet been completely processed.
The efficiency and effectiveness of the accounts payable process will also affect the company's cash position, credit rating, and relationships with its suppliers.

An Account Payable Is Another Company's Account Receivable

It may be helpful to note that an account payable at one company is an account receivable for the vendor that issued the sales invoice. To illustrate this, let's assume that DeliverCorp provides a service for YourCo at a cost of $600 on May 1 and sends an invoice dated May 1 for $600. The invoice specifies that the amount will be due in 30 days. (We will assume throughout our explanation that the companies follow the accrual method of accounting.)
The following table highlights the symmetry between a company's account payable and its vendor's account receivable.
The following table focuses on the general ledger accounts: Accounts Payable and Accounts Receivable.

Accounts Payable Process

The accounts payable process or function is immensely important since it involves nearly all of a company's payments outside of payroll. The accounts payable process might be carried out by an accounts payable department in a large corporation, by a small staff in a medium-sized company, or by a bookkeeper or perhaps the owner in a small business.
Regardless of the company's size, the mission of accounts payable is to pay only the company's bills and invoices that are legitimate and accurate. This means that before a vendor's invoice is entered into the accounting records and scheduled for payment, the invoice must reflect:
  • what the company had ordered
  • what the company has received
  • the proper unit costs, calculations, totals, terms, etc.
To safeguard a company's cash and other assets, the accounts payable process should have internal controls. A few reasons for internal controls are to:
  • prevent paying a fraudulent invoice
  • prevent paying an inaccurate invoice
  • prevent paying a vendor invoice twice
  • be certain that all vendor invoices are accounted for
Periodically companies should seek professional assistance to improve its internal controls.
The accounts payable process must also be efficient and accurate in order for the company's financial statements to be accurate and complete. Because of double-entry accounting an omission of a vendor invoice will actually cause two accounts to report incorrect amounts. For example, if a repair expense is not recorded in a timely manner:
  1. the liability will be omitted from the balance sheet, and
  2. the repair expense will be omitted from the income statement.
If the vendor invoice for a repair is recorded twice, there will be two problems as well:
  1. the liabilities will be overstated, and
  2. repairs expense will be overstated.
In other words, without the accounts payable process being up-to-date and well run, the company's management and other users of the financial statements will be receiving inaccurate feedback on the company's performance and financial position.

A poorly run accounts payable process can also mean missing a discount for paying some bills early. If vendor invoices are not paid when they become due, supplier relationships could be strained. This may lead to some vendors demanding cash on delivery. If that were to occur it could have extreme consequences for a cash-strapped company.
Just as delays in paying bills can cause problems, so could paying bills too soon. If vendor invoices are paid earlier than necessary, there may not be cash available to pay some other bills by their due dates.

Purchase order

purchase order or PO is prepared by a company to communicate and document precisely what the company is ordering from a vendor. The paper version of a purchase order is a multi-copy form with copies distributed to several people. The people or departments receiving a copy of the PO include:
  • the person requesting that a PO be issued for the goods or services
  • the accounts payable department
  • the receiving department
  • the vendor
  • the person preparing the purchase order
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.
One copy of the purchase order will be used in the three-way match, which we will discuss later.

Receiving report

A receiving report is a company's documentation of the goods it has received. The receiving report may be a paper form or it may be a computer entry. The quantity and description of the goods shown on the receiving report should be compared to the information on the company's purchase order.
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 three-way match (which will be discussed shortly).

Vendor Invoice

The supplier or vendor will send an invoice to the company that had received the goods and/or services on credit. When the invoice or bill is received, the customer will refer to it as a vendor invoice. Each vendor invoice is routed to accounts payable for processing. After the invoice is verified and approved, the amount will be credited to the company's Accounts Payable account and will also be debited to another account (often as an expense or asset).
A common technique for verifying a vendor invoice is the three-way match.

Three-way match

The accounts payable process often uses a technique known as the three-way match to assure that only valid and accurate vendor invoices are recorded and paid. The three-way match involves the following:
Only when the details in the three documents are in agreement will a vendor's invoice be entered into the Accounts Payable account and scheduled for payment.
Good internal control of a company's resources is enhanced when the company assigns a separate employee with a specific, limited responsibility. The following chart illustrates the concept of the separation (or segregation) of duties involving accounts payable:
When the duties are separated, it will require more than one dishonest person to steal from the company. Hence, small companies without sufficient staff to separate employees' responsibilities will have a greater risk of theft.
To illustrate the three-way match, let's assume that BuyerCo needs 10 cartridges of toner for its printers. BuyerCo issues a purchase order to SupplierCorp for 10 cartridges at $60 per cartridge that are to be delivered in 10 days. One copy of the PO is sent to SupplierCorp, one copy goes to the person requisitioning the cartridges, one copy goes to the receiving department, one copy goes to accounts payable, and one copy is retained by the person preparing the PO. When BuyerCo receives the cartridges, a receiving report is prepared.
The three-way match involves comparing the following information:
  1. The description, quantity, cost and terms on the company's purchase order.
  2. The description and quantity of goods shown on the receiving report.
  3. The description, quantity, cost, terms, and math on the vendor invoice.
After determining that the information reconciles, the vendor invoice can be entered into the liability account Accounts Payable. The information entered into the accounting software will include invoice reference information (vendor name or code, invoice number and date, etc.), the amount to be credited to Accounts Payable, the amount(s) and account(s) to be debited and the date that the payment is to be made. The payment date is based on the terms shown on the invoice and the company's policy for making payments.
Lastly, the documents should be stamped or perforated to indicate they have been entered into the accounting system thus avoiding a duplicate payment.


Some companies use a voucher in order to document or "vouch for" the completeness of the approval process. You can visualize a voucher as a cover sheet for attaching the supporting documents (purchase order, receiving report, vendor's invoice, etc.) and for noting the approvals, account numbers, and other information for each vendor invoice or bill.
When the vendor invoice is paid, the voucher and its attachments (including a copy of the check that was issued) will be stored in a paid voucher/invoice file. If paper documents are involved, an office machine could perforate the word "PAID" through the voucher and its attachments. This is done to assure that a duplicate payment will not occur.
The unpaid invoices and vouchers will be held in an open file.

Vendor invoices without purchase orders or receiving reports

Not all vendor invoices will have purchase orders or receiving reports. Hence, the three-way match is not always possible. For example, a company does not issue a purchase order to its electric utility for a pre-established amount of electricity for the following month. The same is true for the telephone, natural gas, sewer and water, freight-in, and so on.
There are also payments that are required every month in order to fulfill lease agreements or other contracts. Examples include the monthly rent for a storage facility, office rent, automobile payments, equipment leases, maintenance agreements, etc. Even though these obligations will not have purchase orders, the responsibility is unchanged: pay only the amounts that are legitimate and accurate.

Statements from vendors

Vendors often send statements to their customers to indicate the amounts (listed by invoice number) that remain unpaid. When a vendor statement is received the details on the statement should be compared to the company's records.

The fact that a company can be receiving both invoices and statements from a vendor means there is the potential of a duplicate payment. In order to avoid making a duplicate payment, companies often establish the following rule: Pay only from vendor invoices; never pay from vendor statements.

Related Expense or Asset

The vendor invoices received by a company could involve the following:
  1. A vendor invoice may be a bill for a repair or maintenance service. The vendor's credit terms allow the company to pay 30 days after the date of the service. Since repairs and maintenance do not create more assets, the cost of the service should be reported on the income statement as an expense. Under the accrual method of accounting the expense is reported in the accounting period in which the service occurred (not the period in which it is paid). Other examples of expenses include the cost of office expenses such as electricity and telephone, consulting, and more.
  2. A vendor invoice may be a bill for the purchase of expensive equipment that will be used by the company for several years. The equipment will be recorded as an asset and will be reported in the company's balance sheet section property, plant and equipment. As the equipment is utilized, its cost will be moved from the balance sheet to the income statement account Depreciation Expense.
  3. Another vendor invoice may be a billing for the cost of a service that the vendor will provide in the future, but the payment must be made in advance. A common example is an insurance company's invoice for the premiums covering the next six months of insurance on the company's automobiles. The company will initially debit the invoice amount to a current asset such as Prepaid Expenses. As the insurance expires, the cost will be allocated to Insurance Expense.
    The following table illustrates an insurance premium of $6,000 that is paid in December but the coverage is for the following January 1 through June 30:
The three examples illustrate that some vendor invoices will be immediately recorded as expenses while other invoices are initially recorded as assets. The accounts payable staff needs to be instructed as to the proper accounts to be debited when vendor invoices are entered as credits to Accounts Payable. Generally, a cost that is used up and has no future economic value that can be measured is debited immediately to expense. Vendor invoices for property, plant and equipment are not expensed immediately. Instead, the cost is recorded in a balance sheet asset account and will be expensed in increments during the asset's useful life. Lastly, a prepaid expense is initially recorded in a current asset account and will be allocated to expense as the cost expires.

End of the Period Cut-Off

At the end of every accounting period (year, quarter, month, 5-week period, etc.) it is important that the accounts payable processing be up-to-date. If it is not up-to-date, the income statement for the accounting period will likely be omitting some expenses and the balance sheet at the end of the accounting period will be omitting some liabilities.
During the first few days after an accounting period ends, it is important for the accounts payable staff to closely examine the incoming vendor invoices. For example, a $900 repair bill received on January 6 may be a December repair expense and a liability as of December 31. Another vendor invoice received on January 6 maynot have been an obligation as of December 31 and is actually a January expense.
It is also necessary to review the receiving reports that have not yet been matched to vendor invoices. If items were ordered and received prior to December 31, the amounts must be recorded as of December 31 through an accrual-type adjusting entry.
Note: The proper cut-off at the end of each accounting period becomes more complicated and often more significant if a company has inventories of finished products, work-in-process and raw materials. It is possible that some goods will be included in the physical inventory counts, but the costs have not yet been recorded in Accounts Payable and in the Inventory or Purchases account.

Accruing Expenses and Liabilities

At the end of every accounting period there will be some vendor invoices and receiving reports that have not yetbeen approved or fully matched. As a result these amounts will not have been entered into the Accounts Payable account (and the related expense or asset account). These documents should be reviewed in order to determine whether a liability and an expense have actually been incurred by the company as of the end of the accounting period.
Since the accrual method of accounting requires that all of a company's liabilities and expenses must be reported on the financial statements, companies should prepare an accrual-type adjusting entry at the end of every accounting period. This adjusting entry will credit Accrued Liabilities and will debit the appropriate expense or other account for the amounts that were incurred but are not yet included in Accounts Payable. The balance in Accrued Liabilities will be reported in the current liability section of the balance sheet immediately after Accounts Payable.
It is also common for companies to prepare a reversing entry every month. The reversing entry removes the previous period's accrual adjusting entry and prevents the double-counting of an expense that could occur when the actual vendor invoice is processed.
Note: Under the accrual method of accounting, a company's financial statements must report all expenses and liabilities that are probable and can be measured even if the vendors' invoices have not yet been received or fully processed.
إرسال تعليق

بحث هذه المدونة الإلكترونية