As part of accounting basics, all accountants are expected to be able to fully understand and explain what goes on within the accounts payable account. If you are beginning or possess no accounting knowledge, here is a simple guide to understanding what happens:
The Accounts Payable account is an open account that contains liabilities to creditors. If corporations make purchases for good and services in advance (without payment first), the purchases are made on account/credit while the invoices/bills are recorded into the Liability account (Accounts Payable). As a part of Double entry accounting basics, the Accounts Payable should be credited while another account is debited when the vendor invoice requires recording. Once the payment is made, the Accounts Payable should be debited while cash is credited. Basic accounting practise dictates that corporations who are to receive goods/services on credit are required to make reports of the liability no later than the date in which they are received. This same date has to be recorded within the debit entry to asset accounts or an expense when appropriate.
In order to ensure that the accurate amount is entered within accounting systems, there are certain details one should pay attention to: purchase orders and receiving reports issued by the corporation, company vendor’s invoices, contracts and other agreements. As a good recommendation for accounting basics regarding running an accounts payable process, accountants should ensure that- vendor invoices are processed in a timely fashion, general ledger accounts are recorded accurately, and that the accrual of obligations/expenses are not yet completely processed.
The goal of the Accounts payable process is to identify legitimate invoices and bills of the corporation. Before the invoice issued by creditors/vendors are entered into accounting records, the invoices should reflect/include: The corporation’s purchase order, what the corporation has received, unit costs, totals, calculations, additional terms and more.
Another recommended accounting practise for accountants would be to advise and ensure that there are internal controls for the accounts payable process. This ensures that the corporation’s assets and cash are safeguarded. Part of the account basics for internal controls include fraudulent invoice payment prevention, inaccurate invoice payment prevention, double payment prevention, as well as organisation practises to ensure that all vendor invoices have been accounted for.
Purchase orders are highly recommended to be prepared by corporations when there is intent to order from vendors. Relevant people or departments should be able to receive a purchase order copy detailing: a PO number, date of preparation, corporation name, vendor name, contact details, purchase item description, quantity of purchased items, unit prices, date required, shipping methods and other relevant details. Receiving reports should also be generated to document services or goods the corporation has received since they will be used to reconcile with the purchase order information.
Once both purchase orders and receiving reports have been generated and reconciled, they will require comparison with the vendor’s invoice in an accounting practise known as three way match. The three way match involves the comparison of service/product description, quantity, price, terms of the purchase order, description and quantity of the receiving report and description, quantity, cost, and terms of the invoice. The process is done when all three documents are in agreement and the vendor’s invoice will be input into the Accounts Payable account for payment scheduling.