Accounts Payable - Accounting For Your Creditors

By: Mark Bailey Click author's name for more of his/her articles

When you're managing your small business, you purchase your stocks from suppliers who extend you credit and form part of your Accounts Payable. That means you don't have to pay for your purchases or any services that you request for the duration of the credit period that you've been granted. Your creditor forwards you an invoice which you file until it's due for payment. Accounting for your creditors and paying your bills on time are the duties of an Accounts Payable function. Your bookkeeper must handle a number of important activities to ensure that your Accounts Payable is managed efficiently.

Purchase Orders

You begin your purchases cycle by issuing a valid and authorised purchase order to your supplier. This is the initial step in identifying the items and products that you require for your business. It will contain itemised particulars of your purchase including unit costs and the total payable for the order. When you place an order with your vendor, the prices quoted on the purchase order will generally match the agreed product price list that your supplier has forwarded to you to facilitate ordering.

The purchase order, or PO, constitutes a legal offer by you to purchase the specified items from your vendor. When your vendor accepts this PO, it confirms the order and your supplier is then obliged to fulfil the order accordingly. In an outsourced Accounts Payable function, the bookkeeper raises the PO after checking that the business owner genuinely requires the items. This prevents any errors in ordering and avoids potential disputes between the business and the vendor.

Any mistakes in the PO could result in excess stocks and inadequate or wrong deliveries. If you urgently need items to conclude a customer order, then inaccurate deliveries could be disastrous for your business. That's where your business will benefit from conscientious bookkeeping and careful PO preparation.

Input Bills and Invoices From Creditors

Once your PO has been sent to your supplier, you will receive the goods ordered in a short time followed by the supplier's invoice. These bills have to be input into a computerised accounting system to update your business accounting records. The invoices and bills your business receives could come from trade or other creditors such as utilities and telephone bills. The bookkeeper will correctly identify the invoices and determine if they are trade payables which directly affect the cost of the goods that you sell to your customers and therefore your gross profit.

Paying Creditor Bills and Invoices

The financial cycle of your business depends on a proper Accounts Payable process. Your liabilities to your trade and other creditors, such as regulatory and tax authorities must be recognised and paid for when they fall due. When you agree on credit terms with your vendors and suppliers, these form the basis of the payments made.
Disbursing funds to your creditors is a crucial element of the Accounts Payable process. The credit terms govern when invoices are paid. These can be settled by your bookkeeper either by issuing your company cheques or electronically through an online banking system. Longer credit terms augur well of your business. You have the opportunity to collect monies from your customer which you can then pay your creditors, as part of the working capital cycle.

By maintaining an approved vendor list, you can be assured that the invoices entered into the accounting system are from genuine vendors. The list will contain pertinent information on the vendors and suppliers of your business. An outsourced Accounts Payable function will match the bills and invoices with this list to ensure that the creditors are genuine. Before each payment is made, invoices will be checked against this approved list. No payments will be released if the payment suspect.

Charge Correct Expense Accounts

Expenses incurred by your business must be charged to the correct expense accounts to maintain an accurate record of the various classes of expense. There are separate accounts to capture the cost of transportation, stationery, postage and motor vehicle maintenance. Accounting services that correctly classify and charge expenses make sure that you're aware how your money is being spent in the business. It gives business owners the ability to determine whether they could better manage their expenses by curtailing unnecessary expenditure.

Trade Creditor Reconciliations

An important feature of Accounts Payable is the reconciling of trade creditor accounts. This activity will be done by your bookkeeping service when it receives the monthly statement of accounts from creditors. The closing balance on the statement will show the amount your business owes to the vendor as recorded in the vendor's books. Your bookkeeper will reconcile this figure with the amount payable as reflected in your own accounting records. There may be timing differences that could explain the existence of invoices in the Creditors Statement of Accounts which have not yet been received by your book keeper at the month end.

Creditor reconciliations should normally be performed on a regular basis for trade creditors. This process can identify double invoicing or problems in the creditor invoicing process. It will highlight charges which you have not picked up in your accounting records such as interest penalties for late payment of creditor invoices. There may be creditor invoices that have not been captured in your accounting system in which case your Accounts Payable displays an incorrect balance and your liabilities are understated.

The Accounts Payable function is critical to properly manage the cash flow of your business, identify your risk exposure to unpaid invoices and provide an accurate representation of the liabilities of your business. Bookkeeping Central can provide effective accounting for your creditors by fully managing your entire Accounts Payable process and lifting the burden of paying your creditors and managing your cash flow from your shoulders. That leaves you free to concentrate on those activities that will drive up sales and bring in more revenue for your enterprise. Outsourcing your accounting services is the best solution for a busy small business owner.