Accounts payable: The most important aspects at a glance

Accounts payable ac­count­ing is an essential part of a company’s ac­count­ing – it deals with creditors, i.e. all persons and or­ga­ni­za­tions that make demands on the company. Accounts payable ac­count­ing has a number of tasks. These include entering and checking incoming invoices and preparing the cor­re­spond­ing payments for release and payment. The invoices must also be entered in the ac­count­ing system. This takes place after their formal and factual ver­i­fi­ca­tion through their account as­sign­ment – that is, their as­sign­ment to the ap­pro­pri­ate accounts and through their posting, as well as the posting of cor­re­spond­ing payments. Finally, the invoices are archived in ac­cor­dance with the legal re­quire­ments.

Accounts payable ac­count­ing is the exact coun­ter­part to accounts re­ceiv­able ac­count­ing which deals with accounts re­ceiv­able – that is, debtors to the company. For creditors, on the other hand, the company is the debtor: It owes the supplier or service provider money for goods or services purchased.

Put simply: Accounts payable ac­count­ing takes care of incoming invoices. For example, if a company employs a service provider or orders spare parts, the resulting invoices end up in accounts payable. Depending on the size of the company, it can form its own de­part­ment or simply be part of the range of tasks in ac­count­ing as a whole.

The orderly ac­count­ing of a company requires that the incoming invoices and the resulting payments are correctly processed. The invoice amounts should be credited under payables. The off­set­ting account is an expense account in debit. The sales tax, on the other hand, belongs sep­a­rate­ly to the input tax account: The sales tax is just a tran­si­to­ry item.

Also, reg­u­la­tion-compliant archiving is important as storage duration is often leg­is­lat­ed. For the purpose of archiving, invoices are ideally arranged in a filing system in such a way that they can be found both chrono­log­i­cal­ly and al­pha­bet­i­cal­ly. After the retention period has expired, the accounts payable de­part­ment may then destroy the invoices. Secure elec­tron­ic storage is also permitted.

However, two further tasks of accounts payable ac­count­ing are of great im­por­tance for the success of a company: Invoice ver­i­fi­ca­tion and the or­ga­ni­za­tion of payments (also known as payment man­age­ment).

Checking incoming invoices is an important task for accounts payable ac­count­ing. Errors that occur here can quickly lead to financial loss. Invoice ver­i­fi­ca­tion is divided into two phases:
The first step is always to check an invoice for formal cor­rect­ness. Does the invoice contain all pre­scribed elements (e.g. recipient address, date, invoice number)? Are these elements specified correctly? This may seem ex­ag­ger­at­ed, es­pe­cial­ly in the case of invoices from known, perhaps long-standing business partners – after all, you trust one another. Some companies even send invoices in­for­mal­ly as email at­tach­ments. Finally, ensure that the invoice is error free. Are the items formed correctly and cor­re­spond to number and unit price? Is the total price correct, and is the sales tax cal­cu­lat­ed correctly?

The second phase of the ver­i­fi­ca­tion consists of two parts:

The accounts payable de­part­ment works closely with the goods pur­chas­ing de­part­ment: Do the prices and delivery con­di­tions on the invoice cor­re­spond to the agreed con­di­tions? Are the terms of payment and any special con­di­tions (e.g. discounts) as agreed? Many companies use the Three-Way Match method:

The “three-way” part of the three-way match refers to the three documents that will be compared:

• The vendor's invoice that was received and will become part of an or­ga­ni­za­tion's accounts payable when it is approved
• The purchase order that was prepared by the or­ga­ni­za­tion
• The receiving report that was prepared by the or­ga­ni­za­tion

This is where the ac­cep­tance of goods and the recipient of delivered goods or services come into play: Does the invoice match the delivery note? Does the delivery cor­re­spond to the agree­ments in terms of quantity and quality? Is the delivery complete and on time? Do you have any com­plaints?

After the invoice ver­i­fi­ca­tion, the accounts payable de­part­ment clarifies open questions with suppliers in accounts payable. If an invoice is incorrect or in­ac­cu­rate, then request a correct invoice. The same happens if there are invoices with prices and con­di­tions that have not yet been agreed to. In the event of com­plaints, the pur­chas­ing de­part­ment usually ne­go­ti­ates a price reduction or cancels the order if necessary. In practice, it is also quite common for companies to reduce invoices in view of the de­liv­er­ies and services actually received. The accounts payable de­part­ment then also takes care of the cor­re­spond­ing ad­just­ment postings.

The third important task of accounts payable ac­count­ing is to organize a company’s payments in such a way that errors do not occur and un­nec­es­sary losses are incurred. It is important to keep track of incoming invoices and to prepare and carry out the necessary payments in the same way as the invoice audit has shown, without errors occurring. The following errors are by no means rare, and good accounts payable ac­count­ing helps to avoid them:

• A bill is forgotten
• An invoice amount is paid in­cor­rect­ly or twice
• Suppliers are confused, and a payment ends up in the wrong account

All such cases cost time and effort – and possibly even un­nec­es­sary dunning costs and interest on arrears. However, payments should also be organized in such a way that it is fi­nan­cial­ly most ad­van­ta­geous for the company.

There are also ad­van­tages to paying invoices as late as possible – i.e. past the fixed payment deadline. After all, this period acts like a credit granted by the supplier to their customer over the period in question. However, for a good re­la­tion­ship with the supplier, it can also be ben­e­fi­cial to pay earlier.

Many suppliers give a payment period (e.g. 30 days), but offer a discount if you pay earlier (e.g. within 7 days). Companies like to use these offers and will pay ac­cord­ing­ly. However, they have to keep an eye on their finances: It is possible that the cash is in­suf­fi­cient at an earlier point in time or that financing costs (interest) will be incurred that exceed the cash discount saved.

Another reason for early payment may be that the supplier has promised a bonus for a certain sales target – linked to the actual receipt of payment. It may then be more ad­van­ta­geous to pay for this bonus before the key date rather than at the end of the payment period.

Accounts payable ac­count­ing is also re­spon­si­ble for credit memos for the company’s vendors.

If a company complains about a delivery or service and returns it or agrees to a price reduction, the supplier issues a credit memo for the cor­re­spond­ing amount. In the same way, a rebate granted by the supplier for a volume of sales takes the form of a credit memo. In both cases, the accounts payable de­part­ment posts the amount in question, including sales tax.

In addition to pro­cess­ing all trans­ac­tions related to incoming invoices, a company’s accounts payable de­part­ment has a number of other tasks. These include:

Data main­te­nance

The data of all creditors with whom a company does business is stored in a database – addresses, contact persons, bank details, but also business trans­ac­tions such as orders, de­liv­er­ies, payments, sales, com­plaints and more. This data must be recorded and main­tained. Ideally, such a database should be part of an operating ac­count­ing software, so that a large part of the data also flows au­to­mat­i­cal­ly into it.

Other payments

Accounts payable ac­count­ing is also re­spon­si­ble for recurring payments or debits. These can be rent or lease payments, for example. The de­part­ment sets up cor­re­spond­ing standing orders or issues direct debit au­tho­riza­tions and keeps an eye on whether these payments are made on time and in the agreed amount. The accounts payable de­part­ment can also make other payments, such as travel expenses, as required.

Company A orders 1000 screws from company B. To organize the related processes, accounts payable first creates a master data record for company B as the vendor. To do this, it also assigns a vendor number.

The screws finally arrive and the bill is enclosed. The accounts payable de­part­ment checks them for accuracy, and notes the accounts payable number so that the trans­ac­tion can be easily traced later. Now the posting record follows, so that the correct accounts are also debited. The invoice is then sorted together with other incoming invoices. This is because there may be invoices that are due in advance or that are to be paid with priority.

When the payment deadline is reached, the accounts payable de­part­ment submits the invoice to man­age­ment for approval and then arranges for the out­stand­ing amount for screws to be paid to company B – usually via online banking.

The paid invoice is now archived – either in a folder or elec­tron­i­cal­ly. In the event of a tax audit, it is im­me­di­ate­ly available.

Accounts payable ac­count­ing is in­dis­pens­able for larger companies, but also very useful for smaller companies. It is dedicated solely to accounts payable. If a company purchases goods or services, accounts payable ac­count­ing takes over all the as­so­ci­at­ed ac­count­ing and or­ga­ni­za­tion­al tasks. With a de­part­ment that only deals with creditors, you can ensure that your payments are organized in the best possible way.

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