Lesson 10 in the Basic Accounting series
The accounts payable process or AP process for small business owners is simply the process of accounting for and paying invoices that your business legitimately owes.
This cash flow process involves logging in an invoice in some type of platform like accounting software, which may come with a fee, such as Freshbooks or Quickbooks, spreadsheets, mobile apps, or paper, then removing the transaction when you pay it.
Accounts Payable is a current liability account in your chart of medium business accounts or small business accounts.
Back on my “Learn Accounting Basic Terms” page,
you discovered that your business’s liabilities are debts to suppliers and other business expenses.
You also learned that liability accounts appear on financial records or financial statements like the balance sheet.
Current liabilities are debts due within a year of your balance statement’s date.
Accounts Payable accounts are used in accrual basis accounting because you are recording expenses when they are incurred, which may be before or after they are paid.
It is possible to use an accounts payable process even if you are using cash basis accounting. It is called the hybrid method. See more in this article regarding Cash or Accrual Basis Accounting Methods.
Some bills you may consider setting up in your Accounts Payable are:
- Insurance payments
- Newspaper subscriptions
- Office supplies bought on credit
- Copier lease payments
- Repair bills
- Subcontractor payments (if not paid immediately upon receipt)
- Bookkeeper, accountant, or attorney monthly or quarterly payments
- Anything purchased on credit or paid regularly
Setting Up The Accounts Payable Process:
As stated at the beginning of this article, the accounts payable process begins with entering an invoice, such as a vendor invoice (as soon as you receive it) into some kind of accounting software, accounting spreadsheet, or manually in an accounts payable ledger.
Of course, the easiest and best method for setting up accounts payable is with a computerized accounts payable system…
because most of the work is done in the background…
automatically by your accounting software.
However, many small businesses do not have a computerized accounting system and use either Accounts Payable spreadsheets or paper ledgers (See more detail for using those accounts payable processes later in this article).
That is fine as long as you are not getting very many invoices per day. A general rule is if you are receiving more than two invoices a day or have several employees, it is a good idea to set up a computerized accounts payable system to accurately track and pay what your company owes.
Most computerized accounts payable system will:
- Inform you when bills are due.
- Collect all your vendor information and then automatically pull up their information when entering and pay invoices automatically.
- Enable you to pay those invoices that are due and print out checks.
- Posts your paycheck automatically to the right expense account.
- Warn you if you are trying to enter a bill that has already been posted.
- Track all payments to each vendor.
Setting Up Your Computerized Accounts Payable Process:
The exact instructions for using your particular accounting software to set up an accounts payable system may differ slightly…
but I will give you a general guideline on setting up your accounts payables:
Turn on the accounts payable module in your accounting software if applicable.
Most of the time, this is done in the setup process of your accounting software, but most can be turned on and/or set up at any time.
Gather up the bills you want to enter into your accounts payable.
Go to the Vendor section of your software. Vendors are the people and businesses from which you purchase goods and services. There should be a place to enter your vendor’s information such as name, remit to address, phone numbers, email, contact person, and your account number.
Now go to the “Enter a Bill” section. Using the drop-down list, select the name of the vendor whom you are paying or type in.
Select the payment terms (most are Net 30). Enter the reference number (usually your invoice number). Most accounting software also lets you have the option of entering a note in the memo section, and that note appears in the Accounts Payable register.
Choose which expense account you want the bill posted to. For example, if you bought office supplies on credit, you would choose your Office Supplies expense account. Behind the scenes, your software will debit that expense account and credit your Accounts Payable account.
When it is time to pay bills, go to the “Pay a Bill” in the Vendors section. There you will have the option of choosing one or all bills that are due and print all the checks at once. Again as stated above, your accounting software will do the hard work behind the scenes and debit your Accounts Payable account and credit your Cash account with its AP automation.
Setting Up An Accounts Payable System In Spreadsheets:
The accounts payable process for spreadsheet users involves setting up your file to gather the following information:
- Vendor’s name
- Date invoice was received
- Amount owed
- Account number
- Expense account to be debited
Those of you who use the free accounting spreadsheets from this site will need to set up or download a accounts payable template to track and maintain their accounts payable. My accounting spreadsheets are a single entry bookkeeping system and, therefore, cannot track assets or liabilities.
You can download a free accounts payable template from Office.Microsoft.com: Accounts Payable Ledger.
Or you can build your own with the instructions from this article: How to Create an Accounts Payable Spreadsheet.
Setting Up A Manual Accounts Payable Process:
Below is an example of a bookkeeping entry you would make to record a bill you received for office supplies bought on credit with a credit card:
Office Supplies $157
Accounts Payable $157
Here is an example of the bookkeeping entry you would post when you paid the bill:
Accounts Payable $157
After you have entered the bill, you need to file the hard copy. I keep a “Bills Due” folder on my desktop, and then when I pay it by the due date, I move it to my “Paid Bills” folder. Some people take it a step farther and scan their bills in and keep them in similar files on their computer desktop. Whatever accounts payable process works best for you. The accuracy of the capture of accounting records is an essential element of any successful small business and its bank account.