How to Keep Track of Accounts Payable

Accounts payable (AP) represents money a business owes to suppliers for goods and services purchased on credit. This short-term liability is typically due within 30 to 90 days. Tracking accounts payable is important for a business’s financial well-being, impacting cash flow and maintaining positive supplier relationships. Managing these obligations ensures a clear picture of what the business owes and when payments are due.

Essential Accounts Payable Details

Accurate accounts payable tracking requires gathering specific details for each transaction, forming the foundation for reliable financial records. Key details include comprehensive vendor information, such as the vendor’s name, contact details, and a unique vendor ID. Invoice details are also crucial, including the invoice number, issue date, total amount due, and agreed-upon payment terms. Common terms like “Net 30” mean payment is due within 30 days; “Due Upon Receipt” expects immediate payment. Early payment discounts, such as “2/10 Net 30,” may offer a discount.

Precise purchase details are necessary, involving a clear description of goods or services, quantity, unit price, and line item amounts. Each purchase should be allocated to the correct general ledger account. Tracking the payment status of each invoice is essential, noting whether it is unpaid, partially paid, or fully paid. Businesses must retain supporting documentation, including copies of invoices, purchase orders, and receiving reports, to substantiate expenses for tax purposes and internal verification. The IRS requires accurate records to support income and deductible expenses.

Selecting an Accounts Payable System

Choosing the right system for managing accounts payable depends on a business’s transaction volume and available resources. Manual systems, such as paper-based ledgers or physical filing, offer a low-cost approach for very small businesses with minimal transactions. These methods are time-consuming and prone to human error as transaction volume increases.

Spreadsheets, like Excel or Google Sheets, provide a more organized manual option. They allow businesses to create a simple AP register with columns for essential details like vendor name, invoice number, amount, and due date. Spreadsheets offer more flexibility than paper systems but still require manual data entry and lack advanced automation features.

Dedicated accounting software offers integrated solutions for accounts payable management. These systems include features for vendor management, streamlined invoice entry, payment scheduling, and comprehensive reporting capabilities. They can automate tasks such as invoice data capture using optical character recognition (OCR) and facilitate custom approval workflows, reducing manual effort. Subscriptions for small business accounting software typically range from $10 to $100 per month, with more advanced systems costing more.

Managing the Accounts Payable Workflow

The accounts payable workflow involves a series of procedural actions to process invoices from receipt to payment. The initial step is invoice receipt and verification, where invoices arrive via mail or email and are cross-referenced against purchase orders and receiving reports to confirm accuracy. This verification process helps prevent duplicate payments and ensures the business is billed correctly.

Following verification, data entry involves inputting invoice details into the chosen accounts payable system. This process records vendor information, invoice amount, payment terms, and the general ledger account. Accounting software can automate much of this data capture.

Before payment, invoices typically undergo an approval process to ensure they are authorized and legitimate. This internal control step involves routing invoices to the appropriate personnel for review and endorsement. This step helps safeguard against unauthorized spending and financial fraud.

Payment scheduling organizes approved invoices by their due dates, allowing the business to prioritize payments and manage cash flow effectively. Timely payments help maintain good vendor relationships and can allow the business to take advantage of early payment discounts.

Making payments involves using various methods such as checks, Automated Clearing House (ACH) transfers, or credit cards. Each payment is then recorded in the accounts payable system to update the invoice status to “paid.” Finally, physical or digital copies of paid invoices and supporting documents are systematically filed for easy retrieval and audit readiness, adhering to record retention guidelines.

Reviewing Accounts Payable Records

Regular review of accounts payable records is essential for maintaining financial accuracy and gaining insights into a business’s obligations. A primary tool for this oversight is the Accounts Payable Aging Report. This report categorizes outstanding invoices by their due dates, showing buckets such as current, 1-30 days past due, and 31-60 days past due. It provides a quick visual of pending payments, helping businesses identify overdue amounts, prioritize payments, and manage cash flow.

Another important activity is vendor statement reconciliation. This involves comparing a vendor’s periodic statement with the business’s internal accounts payable records. The goal is to identify and resolve any discrepancies, such as missing invoices, overpayments, or discrepancies in amounts. This process ensures all purchases, returns, and payments are accurately recorded.

Regular review of accounts payable records helps detect potential issues like duplicate invoices, unrecorded liabilities, or fraudulent activities. These reviews ensure the completeness and accuracy of financial data, contributing to sound financial management and decision-making.