Accounts payable in accounting

Accounts payable in accounting refers to the payment process for goods or services from a supplier. The specific accounting activity/entry is known as Accounts Payable or AP for short. It’s also a commonly used name to describe the department/division responsible for making the payments to suppliers and other creditors on behalf of the organization.

Understanding AP in accounting

As previously mentioned, accounts payable in accounting refers to debts that must be paid within a given time period.

A company’s accounts payable balance will appear on its balance sheet under the current liabilities section. It’s an important figure in the balance sheet, where if accounts payable increases over a prior period, the company is buying more goods and/or services on credit.

If the AP amount decreases the company is paying off its prior debts faster than it’s purchasing new items on credit.

Accounts payable in accounting are debts that must be paid within a given time period

“Automated processing hassignificantly in-creased our overall efficiency, shortened payment cycles and helped to improve the manageability of transactions.”

AP Supervisor, Landstar System, Inc.

Get full control of the accounts payables in accounting

Managing your business’s cash flow

AP accounting management is a critical part of managing your business’s cash flow and can be used to manipulate the cash flow to a certain extent.

For example, if the company wants/needs to increase its cash reserves, you can extend the time it takes to pay certain debts in AP.

However this delay in payment (but increase in cash reserves) needs to be carefully weighed against ongoing vendor relationships and is not recommended as it can affect credit reputation. It’s a good business practice to pay bills by their due dates.

“With the Palette implementation, Perryman’s vendor invoices are captured and validated automatically with a 95% accuracy rate. The invoices go to a queue, visible in the Palette dashboard.”

The Perryman Company

Accounts payable vs. Trade payables

Although accounts payable and trade payables are at times used interchangeably, they refer to, albeit similar, but slightly different situations. Trade payables refer to all debts a company owes only for inventory-related goods. Accounts payable includes all short-term debts.

For example, if a restaurant owes money for food ingredients and drinks/beverages they are part of the inventory, and thus part of trade payables. Cleaning services or washing staff uniforms would fall into the accounts payable category. Both of these debts would fall under accounts payable, and most companies combine both under the accounts payable category.

Accounts Payables versus Trade Payables
Invoice scanning with Palette Sofftware

Accounts payable vs. Accounts receivable

Accounts payable and accounts receivable are opposites. AP is the money your company owes your vendors, whereas AR is the money owed to you.

What’s the role of accounts payable in accounting?

AP departments are responsible for more than just paying incoming invoices. AP usually has its own department in an enterprise, while smaller businesses often combine both receivables and accounts payable as a function together. The role of the AP department ultimately depends on the size of the company and it fulfills at least three additional functions besides paying bills and invoices:

  • Travel expenses – Large enterprises may have their AP department handle all their business travel expenses such as making advance airline, car rental, and/or hotel reservations. 
  • Internal paymentsAP accounting is often responsible for distributing internal payments – such as reimbursements – as well as administering petty cash, and controlling the distribution of sales tax exemption certificates.
  • Vendor payments – Accounts payable departments can also be responsible for organizing and maintaining contact information for vendors and suppliers, as well as payment terms and other accounting information.
The role of accounts payable in accounting
AP Automation includes invoice capture, approval workflow and spend analytics

What is AP automation?

Processing incoming invoices and paying bills manually requires a considerable amount of time and is particularly costly.

Using Palette’s AP automation software, you can improve inefficiencies, automate manual processes, and streamline the workflow throughout the whole accounts payable process:

  • Invoice capture & scanning – When receiving an invoice, utilizing AI and capture automation, data can be extracted with high accuracy using OCR from both paper and electronic invoices. This eliminates manual data entry, manual errors, and missed invoices.
  • Invoice approval – Invoices are sent in an approval workflow to managers and supervisors.
  • PO matching – An automated matching engine matches PO invoices to purchase orders and goods receipts. If the invoice and PO match, the invoice is sent directly to the ERP for recording. If not, the invoices are automatically forwarded to the designated approvers/reviewers with a complete package to review including invoice, PO, goods receipt, and previous employee messages. 
  • Invoice payment – Fully matched and approved invoices are transferred to your ERP system for recording and payment – via seamless system integration.
  • Archive and audit – Once paid, all invoice payment information from your ERP is transferred back to Palette. The invoice is archived and remains available in the cloud for future searches, reports, and upcoming audits.

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