What is an Accounts Payable?
An account payable in the books of account means the business has received some goods or a service has been delivered for which the amount is yet to be paid. This also means that goods or service have been received on credit basis where the contractual terms offer credit period to the customer depending upon what has been agreed to between the parties. The credit terms can vary between 0-90 days generally but can be for a higher duration based on the contracted terms. However, businesses normally have credit terms based on the type of industry to which they belong, market practice in the industry, pricing negotiated between the parties and many other factors can influence the credit terms.
Accounts payable process begins with the receipt of the supplier/vendor invoice. Thus, recording of supplier/vendor invoice with accurate information in terms of the product/service, pricing, taxation, due dates of payment, contractual terms with the supplier/vendor, comparison with purchase order etc is a very crucial part for an effective control over the payables.
Accounts Payable Process
Step 1 (Purchase Requisition)
The First step in an Accounts payable process is the receipt of Purchase Requisition from the Purchase Department with specifications and quantity defined and the names of the recommended vendors with the name of the vendor most suitable for the purchase and reasons for their recommendation.
Step 2 (Issue of Purchase Order)
The Next step is the issue of Purchase Order in favour of the Vendor and on terms as defined in the Purchase Requisition. The Accounts payable team needs to ensure that none of the terms mentioned in the PO are violative of the company policies and the due process of approval has been followed.
Step 3 (Receipt of Goods)
On receipt of goods the GRN (goods received note) should be prepared, and the goods quantity and specifications should be checked with the PO and adverse observations to be reported to the management as well as the vendor. The Quality control team should carry out their due diligence and submit their report to the Purchase Department.
Step 4 (Invoice Verification)
Based on inputs from the Quality control team, management and Purchase order issued the purchase department needs to verify the invoice received in terms of quantity, quality, taxes, payment terms etc. The Purchase department should then forward the same to the accounts team for processing the payment based on agreed terms.
Step 5 (Accounting)
The accounts department after receipt of the invoice duly verified and processed from purchase takes the same into the books of account and creates the due date of payment along with tax liability if any. This helps the finance department in analysing the funds flow position of the company.
Step 6 (Release of Payment)
The accounts department based of advice from the management and looking to the funds flow position releases the payment to the vendor as per agreed terms in one single go or on periodicity as may be decided.
Step 7 (Bank Payment & Reconciliation)
Once the release order is issued the Finance Department issues the payment to the vendor. Many companies do involve their internal audit department at the release of payment stage also to avoid any issues at a future date.