What are accounts payable? It refers to the debts incurred by the business. It therefore can be current or long-term liability. Current debts are often those that have to be paid within 6 months to a year, while long-term ones are those that can be fully settled within 2 to as long 10 to 20 years.
Accounts payables do have a very huge impact on the business. For one, if you have a very high liability it’s going to drain your assets, especially cash. If you don’t take charge of your dues, you may never realize you’re on the road to insolvency.
There’s a need to keep track of accounts payables so you can pay them on time. A lot of creditors are not afraid to slap you with additional fees or charges for late repayments. Take, for example, banks and credit card companies. On the other hand, if you pay those dues promptly, you boost your credit score, making it easier to secure business loans with lower interest rates and favourable payment terms.
Tracking accounts payables can also help clear or prevent issues including ethical ones. A lot of companies have experienced embezzlement. However, they were not able to know it because they didn’t look into the accounts payables. It’s possible the criminal issues fake invoices or purchase orders.
The accounts payable cycle refers to a series of processes that deal with the recognition, recording, and assessment of accounts payables. It’s meant to help businesses increase accountability, reduce errors and omissions, and promote more cost-effective methods of procurement and payment procedures.for more details see bookkeeping melbourne
The life cycle of the accounts payable can be very short or long depending on the nature of the accounts payable as well as the business. Small businesses have shorter cycles, more so if they are involved in providing services like web designing or writing. These businesses don’t maintain any kind of inventory and thus they don’t have a long list of suppliers. Normally the accounts payables are related to small business loans. Big ones, on the other hand, can have a very extensive cycle, particularly if they are into selling and manufacturing. In fact, they can have a dedicated team for accounts payable.
But just to give you an idea, a full cycle can include the following:
Issuance of Purchase Order:
Before you purchase the materials, for example, you have to get an authorization for procurement, which means you ask permission from your head or the company that you’re planning to buy the listed items. Once the signature is affixed, you can then place an order to your supplier.
Delivery of Goods or Services:
The order arrives. You check the goods or verify the services. If you’re satisfied with everything, you notify your supplier.
Confirmation of Invoice:
The supplier then sends you an invoice through fax, mail, or in person. The invoice includes information such as the items delivered or services rendered, total amount due, and the credit terms (if you got the items on credit). You then confirm all the data as correct.
Preparation and Delivery of Check:
You then issue a check that covers the amount due.
Recording of the Transaction:
The accounts payable is then recorded into the accounting books, such as your journal and ledger. Take note of the item number if you have a chart of accounts for consistency in accounts payable cycle.