Never judge someone if you have not walked a mile in their shoes. That way, when you do judge him, you’re a mile away and you have his shoes. All jokes aside, it is easy when you are a stranger or an outsider to judge a situation on face value. The same goes for an outsider to Accounts Payable (either the department or the entry).
They are a species on their own and are extremely misunderstood. We tend to think of them only as the department of a business whose sole responsibility it is to pay the bills, and in essence that is true, but we do not truly grasp the importance of the value that their service or that one entry delivers to the overall health of a business.
Investopedia defines Accounts payable (AP) as: “An accounting entry that represents an entity’s obligation to pay off a short-term debt to its creditors. Another common usage of Accounts payable refers to a business department or division that is responsible for making payments owed by the company to creditors.”
A strong Accounts Payable department or ethic packs a powerful punch with regards to the impact it has on a business’s operational, strategic and financial viewpoints. Imagine, and humor me for a moment, the whole Accounts Payable department takes annual leave, heading for white sandy beaches and Pina Coladas. Who will pay the bills? Vendors would cut back on their vendors and suppliers, inventory and services would come to a screeching halt and limit revenues and the whole business would suffer. Everyone in the business would be affected negatively.
Here are a few Accounts Payable principles to help you use them properly and effectively:
Accounts Payable should not be confused with expenses because there is a clear distinction between the two
As mentioned Accounts Payable costs are those that have been incurred but not yet paid since money is still owed to a creditor and is considered a liability. Expenses are costs that are already paid out and are related to revenue. This includes salaries, or a lunch bill you charged to the company for wining and dining a potential client.
Cash Purchases do not qualify as Accounts Payable
Cash purchases is simply a normal cash transaction where you pay in cash immediately and you get the goods or services you need. There is no credit or purchase orders involved. If a company purchases supplies for the purpose of producing a product and they buy in bulk chances are they won’t be able to pay in cash; this procurement qualifies as Accounts Payable because the purchase was on credit and a purchase order was raised. Payment terms to settle the outstanding amount can be done in a series of installments or within a certain number of days, all depending on the vendor.
The term “Three-Way Match” describes the most standard procedure businesses use to process valid invoices received from suppliers. “Three-Way” refers to the 3 documents involved, which include the Supplier Invoice, Purchase Order and Receiving Report. “Match” refers to the comparison or cross-reference checks between these documents. Order numbers, line items, quantities ordered and quantities received should match 100%. When all the documents have been compared and validated by the three-way match process, the invoice can be forwarded to the Accounts Payable department to be processed for payment. Most companies or businesses will not consider an invoice to be payable until they have a purchase order with a price that matches the price on the invoice, and a Receiving Report from the requisitioner that indicates that the items or services were received in good order.
Considered to be time-consuming, especially if still done manually, however it helps to identify some of the following mismatches associated the whole procurement process and enables you to come up with ways to rectify them:
- Product errors in the Purchase Order and on the Receiving Document
- Product errors on the Supplier Invoice
- Sudden price changes after the Purchase Order was created
- Quantity errors on the Purchase Order, Supplier Invoice and Receiving Report
- Sudden added shipping cost
- Sudden added surcharges that magically appear
- Discounts discussed with suppliers were not included
Using the Three-Way Matching method safeguards a company’s assets and enables greater discipline, administration and control. When it comes to purchase orders, it helps to have a dedicated purchase approval system in place to prevent these errors from happening.