Accounts payable definition, examples, and how it works – Article

To effectively manage accounts payable, you must record transactions using the accrual basis of accounting. the process can be seen here:

1. accumulation ledger
2. purchase order
3. supplier invoices
4. shipping receipts
5. general ledger entries

1. use accrual accounting

Accrual accounting requires businesses to record revenue when it is earned and expense when it is incurred to generate revenue. all businesses should use accrual accounting so that revenues can match expenses, regardless of the timing of the cash flows.

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The accounts payable department must use accrual accounting to post financial transactions and reports. To establish a clearly defined process, meet with your AP department. if your business is smaller, an accounting clerk can handle accounts payable.

2. issue the purchase order

Most spending decisions require a purchase order (PO). Suppose, for example, that Acme Manufacturing needs to order a $10,000 piece of machinery. Before placing the order, the plant manager must fill out a purchase order, which lists the price of the machinery and other details.

the owner or another person with financial responsibility, such as the financial director), approves the purchase order. at this point, the order can be placed. small purchases, like $40 worth of office supplies, don’t need an order. POS are generally used only for purchases over $1,000. Purchase orders help a company control expenses and keep management aware of cash outflows.

3. receive invoices from suppliers

When the order is placed, the supplier will send an invoice. The person responsible for the accounts payable tasks must record the following information in the accounting system:

• due date: the date the invoice is due
• payment terms: some providers offer a discount if the invoice is paid within 5-10 days. if a discount is offered, you may decide to pay the bill in a shorter period of time.
• contract information: includes provider name, address, email, and customer invoice number. If the seller accepts electronic payments, include that information with your billing information.
• Purpose: If you need to plan payment for larger purchases, include a description of the purchase.

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When the item is received, the supplier must include a shipping receipt.

4. request a shipping receipt

The shipping receipt details what the vendor sold to the customer. the receipt includes a description and the number of items included in the shipment.

the details of the purchase order, invoice and shipping receipt must be the same. reviewing these documents ensures that the order was approved and that you received the items ordered.

if the data matches, the accounting department can generate a check. the landlord must review all documents before signing the check and paying the bill.

In addition to handling paperwork, the accounts payable department needs to post accounting entries.

5. post ledger entries

The accounts payable department posts journal entries to the general ledger. a journal entry contains all the information needed to record a transaction. There are two common journal entries for accounts payable: a credit purchase and an invoice paid in cash.

purchase on credit

When acme manufacturing orders the $10,000 piece of machinery on March 5, it posts this journal entry:

• debit #3100 machinery (asset account): $10,000
• credit #5000 accounts payable: $10,000

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(to record the purchase of machinery on credit on March 5)

acme posts a debit to increase the Machine Assets account (#3100) and posts a credit to increase Accounts Payable (#5000).

The journal entry includes the date, accounts, dollar amounts, debit and credit entries, and a description of the transaction.

When the bill is paid, the accounts payable balance decreases.

invoice paid in cash

acme manufacturing pays the invoice on April 6th and publishes this journal entry:

• debit #5,000 accounts payable: $10,000
• credit #1,000 cash: $10,000

(to record the payment of the invoice for April 6)

acme records a debit to decrease accounts payable (#5000) and a credit to reduce cash (#1000).

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