Introduction

What Is Accounts Payable?

Accounts Payable is a means by which you can monitor the disbursement of money from your company. Simply put, Accounts Payable records and pays a company’s bills or liabilities.

When a liability or debt is incurred, the vendor to whom the money is owed issues an “invoice.” Besides the total amount of money owed, the invoice usually contains information about any discount the vendor may offer as an incentive to pay the invoice in a timely fashion, and when the total amount of the invoice is due (the terms of the invoice); the products or services purchased; and the amount of freight or tax attributed to the purchase.

The debt or liability is recorded into Accounts Payable when you enter the invoice. Normally, when you post an invoice the system credits, or increases, the balance in a liability account. Examples of liability accounts are Interest Payable, Income Tax Payable, Mortgages Payable, and Accounts Payable. The corresponding debit amount usually increases the balance in some type of expense, inventory, or work in process account. If General Ledger is part of your system, Accounts Payable postings also update the General Ledger balances, providing you with up-to-date financial information.

The following “T charts” show the effect of the posting of a $180.00 invoice for a telephone bill.

Sometime after the invoice has been received and entered but before the due date of the invoice, you should pay the vendor for the purchase. Using Accounts Payable, you can pay the vendor by one of two different methods. The first method is called a manual or “hand” check. A hand check is either typed or hand written, sent to the vendor, and then recorded into the Accounts Payable application through a data entry process. The second method of payment is an automatic or “machine” check. A machine check is created, printed, and posted through the Check Processing function in the Accounts Payable application. Checks are created for invoices that have been entered into the system and for which payment will be due prior to the next check processing cycle.

The check processing cycle is normally performed multiple times during an accounting period and produces numerous checks each time. When posted, both invoice payment methods debit (decrease) the liability account Accounts Payable and credit (decrease) the balance in the Cash account on which the check was drown. Below is a “T chart” example of a machine check or hand check payment for the same $180.00 telephone bill.

Hand checks can also be used for payments of purchases which you have NOT previously recorded in Accounts Payable through entry of and invoice. This type of payment is called a “direct disbursement” or “direct expense.” With a direct disbursement, the only record of the purchase or expense is the check itself and no liability is incurred. Consequently, entry of a direct disbursement debits (increases) the balance of the expense account instead of decreasing the liability. As with all checks, the offsetting credit amount decreases the balance in the Cash account. Direct disbursements are entered into the system using the Hand Checks entry function.

The following “T charts” show an example of a direct payment for $50.00 of maintenance supplies purchased with a hand check.

Adjustments can be entered to make changes to invoices that you have already posted. You can adjust the amount of an invoice or change the expense account to which the invoice was posted. The following “T charts” show a typical example of an adjustment to change the amount of an invoice. The invoice was originally entered for $220.00 but actually should have been $200.00.

The Accounts Payable Cycle.

Accounts Payable is normally operated on a monthly accounting cycle. During the month you enter and post invoices as they are received, enter and post adjustments as necessary, and enter and post hand checks as they are issued. Then perhaps weekly, bi-weekly, or enter daily, depending on the volume of invoices you receive, you use the checks processing cycle to create, print, and post machine check payments to your vendors. At the end of the month, print the monthly reports and balance the Accounts Payable subsidiary ledger to your General Ledger. Finally, run the Close Month process to close Accounts Payable for the current month and prepare for next month’s processing.

Reports can be printed and inquiries used to supply information at any time during the month.