Accounts Payable Is the money a company owes to a supplier or vendor for goods purchased on credit many small companies use accountants to handle accounts payable large companies typically have an accounts payable department Is a liability account Will normally have a credit balance 2
Accounts Payable s Role in Business Includes: allowing the company to purchase goods and services on account helping a company keep records of the amounts they owe maintaining relationships with suppliers 3
Accounts Payable s Role in Business Includes: ensuring bills are paid on indicating overall operations time effectiveness of company The company receiving goods or services on credit must report the liability no later than the date they were received. The same date is used to record the debit entry to an expense or asset account. This is why accountants say under the accrual method of accounting expenses are reported when they are incurred not when they are paid. 4
Accounts Payable Process Has the main purpose of making sure only the company s bills and invoices which are legitimate and accurate are processed 5
Accounts Payable Process Involves reviewing vast amounts of information to ensure only legitimate and accurate amounts are entered in the accounting system information which should be reviewed is found in the following documents: purchase orders issued by the company receiving reports issued by the company invoices from the company s vendors contracts and other agreements 6
Accounts Payable Process Must be well-run Should include: the timely processing of accurate and legitimate vendor invoices accurate recording in the appropriate general ledger accounts the accrual of obligations and expense which have not yet been completely processed The efficiency and effectiveness of the accounts payable process will also affect the company s cash position, credit rating and relationships with its suppliers. 7
Accounts Payable In one company, is an account receivable for the vendor which issued the sales invoice example: Kelvin HVAC installed a new air conditioning system for Penny s Bistro for $1,000 on May 1 and sent an invoice on May 1 for $600 which is due 30 days after the invoice was sent the $1,000 is an accounts payable for Penny s Bistro and an accounts receivable for Kelvin HVAC 8
Accounts Payable Process The company sends the vendor a purchase order The company fills out a receiving report The vendor sends a vendor invoice based on the receiving report information The company compares the invoice, receiving report and purchase order to ensure they are the same 9
Accounts Payable Process The invoice is sent to the accounts payable department The invoice is approved before payment is made 10
Vendor Is a person or business who provides goods and services to a company example: a hotdog company may be a vendor for a food truck Is also known as a supplier 11
Purchase Order (PO) Is a document which authorizes a buyer to receive goods/services from a seller Is a multi-copy form which will be distributed to several individuals such as: individual requesting a PO be issued for the goods or services accounts payable department or individual responsible for handling accounts payable receiving department vendor individual preparing the purchase order 12
Purchase Order (PO) Typically includes the following information: PO number date prepared company name vendor name contact information for business contact Source: http://www.besttemplates.org/wp-content/uploads/2012/06/purchase-order-template.jpg 13
Purchase Order (PO) Typically includes the following information: description of items being purchased quantity of items unit prices shipping method date needed other pertinent purchased information Source: http://www.besttemplates.org/wp-content/uploads/2012/06/purchase-order-template.jpg 14
Receiving Report Is an internal document used to record the materials and inventory were received by the company the quantity and description of the goods shown on the receiving report should be compared to the information on the company s purchase order After the receiving report and purchase order information are reviewed and reconciled, they will be compared to the vendor invoice. 15
Receiving Report Can be a paper form or a computer form Should contain an accurate description of the items received Source: http://www.formville.com/cdn/preview/receiving01.jpg 16
Vendor Invoices Are bills for the goods and/or services on credit when the invoice or bill is received, the customer will refer to it as a vendor invoice Are sent to accounts payable for processing after invoices are verified and approved, the amount will be credited to the company s accounts payable account and will be debited to another account (as an expense or asset) 17
Vendor Invoice Includes: description of the company order the items the company received the cost of each item the total cost of the order the payment terms Source: http://www.powerims.com/manual/doc14t.html 18
Three-Way Match Is a process used to assure only valid and accurate vendor invoices are recorded and paid Involves making sure the following documents are in agreement: company purchase order company receiving report vendor invoice Only when the three documents are in agreement will a vendor s invoice be entered into the accounts payable account and scheduled for payment. 19
Vendor Invoices May or may not have a purchase order or receiving reports; therefore the three-way match would not be possible a company does not issue a purchase order for its utilities (phone, electricity, sewer, water, etc.) a company has payments due each month to fulfill agreements and contracts (rent, car payments, equipment leases, etc.) 20
Vendor Invoices Must be paid regardless of if they have a purchase order or receiving report, this falls under the responsibility of paying only the amounts which are legitimate and accurate 21
Vendor Invoice Credit Terms Provide information about when an invoice is due Can specify a discount if the company pays its bill earlier than the due date 22
Invoice Payment Terms Examples Include: net due upon receipt the invoice amount is due immediately net 30 days the amount on the invoice is due 30 days from the date of the invoice 2/10, n/30 this means two percent of the amount owed will be deducted from the bill if the full amount is paid within 10 days instead of 30 days 23
Vendor Statements Are often sent to a vendor s customers to indicate amounts which remain unpaid or combine invoices Should be compared to company records when received 24
Accounts Payable Process Should include internal controls in order to: prevent paying a fraudulent invoice prevent paying an inaccurate invoice prevent paying a vendor invoice multiple times be sure all vendor invoices are recorded A company can receive both invoices and statement from a vendor, so there is the potential for duplication of payment. Companies should always compare to company records to keep track of what they owe. 25
Vendor File Is a document or file which provides information about company vendors Includes information such as: vendor invoices receiving reports vendor statements 26
Maintaining a Vendor File Is an important task Requires keeping vendor information up to date with the state of the vendor mergers address changes name changes Prevents companies from the following: late product shipments late/duplicate payments wasted time 27
Vendor File Maintenance Tips Keep all documents in the vendor file throughout the ordering process Have different individuals prepare documents to prevent errors and illegal activity Use vendor invoices instead of vendor statements to prevent overpaying vendor statements include information about several invoices 28
Accounts Payable Subsidiary Ledger Is used to track accounts payable transactions in more detail Contains an account for each vendor/supplier which is owed The total amount in the subsidiary ledger is transferred to the general ledger monthly (usually). The general ledger includes less detailed information on all company accounts. 29
Schedule of Accounts Payable Is a report which lists all amounts owed by a business Is a method to further ensure accounts payable entries are properly recorded Provides information about all vendors/creditors which are owed money Is developed on a monthly or weekly basis, depending on the company s needs 30
Schedule of Accounts Payable Uses Include: helping the accounts payable department/manager track and organize vendor accounts discovering overdue/almost-due bills making business transactions faster 31
Schedule of Accounts Payable Example Accounts Payable Schedule Luxe 25 Inc. December 31, 2015 Transaction Supplier Total Accounts Payable 12.001 Gil s Goodies 3,500 12.002 Heinz County Utilities 2,250 12.003 Laura Boot Co. 12,000 12.004 Steinberg Jewelry 7,250 Total 25,000 32
Accounts Payable Increases when a company buys a good or service on credit Is an increase in a liability, so it is a credit when businesses decrease accounts payable by making a payment, there is a debit to accounts payable Normally has a credit balance 33
Purchase on Account (On Credit) Is when a business receives the good or service and promises to pay at a later date the account which is debited depends on the good or service purchased example: expense accounts are for items which do not increase assets rent expense, utilities expense account examples which increase assets land, inventory, equipment 34
Accounts Payable Journal Entries Examples Record a vendor invoice for utilities on account debit: utilities expense credit: accounts payable Record a vendor invoice for buying merchandise to sell debit: inventory credit: accounts payable 35
Accounts Payable Journal Entries Examples Paying a vendor invoice which was in accounts payable debit: accounts payable credit: cash 36
Purchase Transaction Journal Entry Example Luxe 25 is a luxury clothing store; it received an invoice for the $12,000 worth of boots it purchased on credit from a vendor this is inventory, which will increase assets; inventory is debited accounts payable is a liability for Luxe 25; it is placed as a credit Journal Entry for Luxe 25 Debit Credit Inventory 12,000 Accounts Payable 12,000 37
Accounts Payable Effects cash flow cash flow statement: operating activities cash flow generated from goods and services if accounts payable increases (expenses are not yet paid), this is positive for cash flow a decrease means there is less cash flow example: if a restaurant pays for its food inventory with a credit card, they have more cash on hand the cash can be used (cash flow) in other ways until they pay their food inventory bill 38
Accounts Payable Effects the balance sheet balance sheet: liabilities an increase in accounts payable is an increase in liabilities 39
Accounts Payable Effects the income statement income statement: net income an increase in accounts payable can increase an expense account an increase in expense lowers net income example: if a company pays to repair a printer on credit, there would be a debit to supplies repair expense (increase) and credit to accounts payable (increase) 40