Accounts payable

From Wikipedia, the free encyclopedia

Accounts payable is one of a series of accounting transactions covering payments to suppliers owed money for goods and services. The average household performs this task by writing cheques each month to such suppliers to the electric company, telephone company, cable television or satellite dish service, newspaper subscription, and other such regular services.

Business organisations which have become too large to perform such tasks by hand, or who prefer not to do them by hand will generally use accounting software on a computer to perform this task. Accounts payable is classified as a liability account and as such normally has a credit balance. Accounts payable is classified as a Current Liability because the obligation is generally due within 12 months from the initial transaction date.

Other types of accounting transactions include accounts receivable, payroll, and trial balance.

Reconciliations

One of the most difficult and time-consuming tasks can be reconciling company records of invoices and payments against vendors' statements of outstanding invoices. If the two companies have applied invoices to different sets of credit memos and checks, and the situation has been going on for a long time, it can become very difficult to untangle. For instance, if a company cuts a check for invoice #3, and the vendor applies the check to invoices #1 and #2, the vendor may continue asking for a payment for invoice #3. If this situation is multiplied over hundreds of invoices, it can take hours or days to resolve the discrepancies.

Expense administration

Expense administration is usually closely related to accounts payable, and sometimes those functions are performed by the same employee. The expense administrator verifies employees' expense reports, confirming that receipts exist to support airline, ground transportation, meals and entertainment, telephone, hotel, and other expenses. This documentation is necessary for tax purposes and to prevent reimbursement of inappropriate or erroneous expenses. Airline expenses are, perhaps, the most prone to fraud because of the high cost of air travel and the confusing nature of airline-related documentation, which can consist of an array of reservations, receipts, and actual tickets.

Petty cash is also usually paid out by AP personnel in the form of a check made out to an employee, who cashes the check at the bank and puts the cash in the petty cashbox.

Internal controls

A variety of checks against abuse are usually present to prevent embezzlement by Accounts Payable personnel. Separation of duties is a common control. Nearly all companies have a junior employee process and print the checks and a senior employee review and sign the checks. Often, the accounting software will limit each employee to performing only the functions assigned to them, so that there is no way any one employee – even the controller – can singlehandedly make a payment.

Some companies also separate the functions of adding new vendors and entering vouchers. This makes it impossible for an employee to add himself as a vendor and then cut a check to himself without colluding with another employee.

In addition, most companies require a second signature on checks whose amount exceeds a specified threshold.

Accounts payable personnel must watch for fraudulent invoices. In the absence of a purchase order system, the first line of defense is the approving manager. However, AP staff should become familiar with a few common problems, such as "Yellow Pages" ripoffs in which fraudulent operators offer to place an advertisement. The walking-fingers logo has never been trademarked, and there are many different Yellow Pages-style directories, most of which have a small distribution. According to an article in the Winter 2000 American Payroll Association's Employer Practices, "Vendors may send documents that look like invoices but in small print they state 'this is not a bill'. These may be charges for directory listings or advertisements. Recently, some companies have begun sending what appears to be a rebate or refund check; in reality, it is a registration for services that is activated when the document is returned with a signature."

In accounts payable, a simple mistake can cause a large overpayment. A common example involves duplicate invoices. A invoice may be temporarily misplaced or still in the approval status when the vendors calls to inquire into its payment status. After the AP staff member looks it up and finds it has not been paid, the vendor sends a duplicate invoice; meanwhile the original invoice shows up and gets paid. Then the duplicate invoice arrives and inadvertently gets paid as well, perhaps under a slightly different invoice number. As Mary S. Scheiffer points out in Accounts Payable: A Guide to Running an Efficient Department, "Depending on the controls in place, the second payment may or may not be caught! The phenomenal growth of payment recovery firms gives testimony to the fact that this is a serious issue in corporate America today."

Audits of accounts payable

Auditors often focus on the existence of approved invoices, expense reports, and other supporting documentation to support checks that were cut. In the real world, it is not uncommon for some of this documentation to be lost or misfiled by the time the audit rolls around. An auditor may decide to expand the sample size in such situations.

See also

• International Accounts Payable Professionals
• List of finance topics

References

• Casher, Jonathan D.: How to Find and Eliminate Erroneous Payments, APA's Employer Practices, Winter 2000.
• Schaeffer, Mary S.: Accounts Payable: A Guide to Running an Efficient Department, Wiley, 2004.
• The Accounts Payable Network: http://www.theaccountspayablenetwork.com. AP news, research, topics, forums and tools.