Your Ultimate Accounts Payable Guide: Definition, Examples, Process, Jobs, and Automation

Welcome to our comprehensive Accounts Payable (AP) guide, your go-to resource for mastering AP management. Our team of AP experts has carefully curated this ultimate guide to equip you with all the knowledge and tools you need to efficiently manage your accounts payable processes. In this guide, you'll discover:

• The end-to-end AP process, from invoice creation to payment
• Best practices for streamlining your AP workflows and reducing manual efforts
• Proven strategies to overcome common AP challenges
• The ins and outs of AP automation and how it helps finance teams
• A dedicated FAQ section addressing the most frequently asked questions about AP management

Now let’s dive in!

What are Accounts Payable (AP)?

"Accounts Payable" refers to money a company owes its vendors for goods or services they purchased on credit. Teams record these liabilities, which represent short-term debt the company will pay over a specific period, in the general ledger. 

‍Efficiently managing accounts payable helps businesses build strong relationships with vendors and suppliers while maintaining positive cash flow. 

Here are a few common examples of accounts payable: 

• Supplier Invoices
• Raw Materials
• Legal Fees
• License Fees
• Contractor Payments

Is Accounts Payable a Credit or a Debit in Accounting?

Accounts payable is both a credit and a debit. AP staff first record new invoices in the general ledger as a credit and then as a debit to the expense account. This follows the matching principle of double-entry bookkeeping and accrual accounting, where professionals record revenues and expenses in the same period before paying the invoice.

Recording accounts payable as both a credit and debit enables businesses to accurately track the payments they owe while also maintaining detailed financial records. Matching expenses with the revenues they generate provides finance teams with a clearer view of their business's financial health.

Is Accounts Payable a Liability?

Yes. Since accounts payable are debts a company owes to creditors, they are considered liabilities. That means that they will be taken from your account whenever you pay a debt. To take things a step further, accounts payable are current liabilities - this is the case because the company expects to pay them in less than 12 months. You'll record accounts payable as a liability on the balance sheet.

Are Accounts Payable Treated as Business Expenses?

Some people mistakenly think that accounts payable are business expenses. This is not the case. As outlined in the previous section, accounts payable are liabilities reported on the balance sheet. On the other hand, business expenses are reported as expenses on the income statement. They are different.

Accounts Payable (AP) vs. Accounts Receivable (AR): What's the Difference?

While accounts payable (AP) and accounts receivable (AR) may seem similar, they represent different aspects of a company's financials. AP refers to the money that a business owes its vendors for goods and services rendered, while AR is the money that customers owe the company. In other words, AP represents a company's short-term liabilities (money going out), while AR reflects its short-term assets (money coming in).

Managing AP effectively is crucial to maintain strong relationships with vendors, avoiding late fees and other penalties, and ensuring healthy cash flow for the business. On the other hand, managing AR is essential for improving cash flow, ensuring timely customer payments, and reducing bad debt expenses.

Accounts Payable vs. Trade Payables 

Trade payables are a kind of accounts payable. They refer to the money owed to vendors for inventory, such as raw materials or supplies. In short, all trade payables are accounts payables but not all accounts payable are trade payables. 

The Relationship Between Accounts Payable and Cash Flow

Cash flow and accounts payable have a close relationship in any organization. Accounts payable represent a short-term liability, which significantly impacts cash flow over time. Strong accounts payable management enables businesses to maintain adequate cash reserves and achieve their short-term and long-term financial goals. 

For example, delaying payments can help improve cash flow in the short term, and leveraging credit can help fund growth or capital investments. Managing accounts payable efficiently is vital for maintaining positive cash flow and improving financial health.

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What is an Accounts Payable Invoice?

An accounts payable invoice is a request for payment from a supplier to the accounts payable department. These invoices represent outstanding amounts owed for particular goods or services purchased. 

What is On an Accounts Payable Invoice?

Invoices include many important pieces of information detailing a purchase, including:

• A unique number that follows the previous invoice number, allowing for easy tracking and reference
• The seller's business name and address, as well as the date the invoice was issued
• Important payment information, such as the payment due date and terms of payment
• The customer's name and address for record-keeping
• A detailed description of the products or services sold, along with the quantity and price of each item
• Any credits or discounts applied, as well as the subtotal (excluding tax) and the total amount of tax (if applicable)
• The total amount due

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What Does a Traditional AP Process Look Like?

Businesses can establish trust with their suppliers by accurately processing, approving, and paying invoices on time. An organized AP process also ensures that teams keep their financial records accurate and up-to-date. Here is a detailed look at what the typical accounts payable process entails:

1. Invoice Processing/Capture: The accounts payable process begins when a business receives an invoice from a supplier. The invoice summarizes the quantity of what was received and the amount due. Teams often receive invoices in various formats like paper copies or online files via a digital solution. Depending on the AP workflow, teams must either manually capture the invoice and code it into their accounting system by hand, or use an AP automation software like Centime to automatically manage this process.
2. Invoice Approval: After receiving an invoice, AP teams then verify its information is accurate. Larger companies typically have a clerk that works with each department to sort through the invoices for their respective purchases. This clerk then posts approved invoices to the general ledger, which addresses the corresponding vendor account and an expense account. This allocation enables meaningful cost-performance accounting and controlling practices.
3. Payment Authorization. After securing the appropriate invoice approval, the AP team schedules it for payment. The accounts payable department is responsible for paying all incoming invoices on time and taking advantage of any possible deductions for early payment discounts, rebates, or quality defects. Before businesses pay an invoice, it's best practice to have a third party review and authorize all scheduled payments.‍
4. Payment Execution: After authorizing a payment, AP teams will pay the respective invoice and send remittance details over to the vendor. After that, the executed payment will get posted to the general ledger, and the team can close out the invoice.

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What are the Disadvantages of Manually Managing AP?

Manual accounts payable processes have several disadvantages that can hinder a business's financial success. Here are some of the potential drawbacks of a manual AP process:

• Inaccurate performance and financial reporting. Manual AP processes often result in human error, leading to inaccurate financial reporting and performance. This can negatively impact your company's financial health and lead to poor investment decisions.
• Less time to work on higher-value activities. Manual accounts payable processes can be tedious and time-consuming, tying up employees with administrative tasks. This prevents team members from focusing on more strategic activities that contribute to the company's bottom line, leading to lost productivity and missed growth opportunities.
• Increased risk of fraud and business email compromise (BEC). Manual accounts payable processes can increase a company's risk of accounting fraud, duplicate payments, and business email compromise. 
• Late payments, missed discounts, and inaccurate payments. Human error can result in late payments, missed discounts for early bill payment, and inaccurate payments. These errors can damage relationships with suppliers and lead to increased costs.
• Limited ability to ensure compliance. Manual processes rely on audits that add further costs while having limited ability to ensure compliance. This can result in inaccuracies and errors in financial reporting, negatively impacting a company's reputation and financial health.

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What are the Best Practices to Know for Accounts Payables?

Implementing accounts payable requires a systematic approach, but there is also an art to it. Multiple methods exist for managing accounts payable, and experts have identified a range of AP best practices that can guide you towards success. By following these practices, you can ensure that you stay on the right track and achieve optimal outcomes: 

• Automate accounts payable functions where possible. Many functions related to AP, like capturing invoices and scheduling payments, require manual labor which often leads to human errors. Automation solutions are a great way to minimize human error, expand your business's AP capabilities, and save you and your team time, enabling you to focus more on the big picture rather than redundant tasks. 
• ‍Keep up with regular audits. There's no way to know how well you and your AP team are doing without conducting regular audits. The audits should determine whether you and your team are adhering to all AP policies and procedures. ‍
• Train your team on an ongoing basis. Good AP management hinges on ongoing training. Train and retrain personnel on your business’s AP process. And since AP rules and regulations constantly evolve, it’s crucial to keep the team abreast of any changes in the accounts payable landscape or your internal processes.‍‍
• Distribute responsibilities across staff members. Fraud poses an inherent risk to businesses, especially when one team member is burdened with multiple responsibilities. This is why the principle of segregation of duties is crucial. It is vital to ensure that the individual responsible for receiving invoices is different from the one handling payments. By implementing this practice, organizations can mitigate the potential for fraudulent activities and safeguard their financial integrity.

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What are the Core Tasks of the Accounts Payable (AP) Department

Managing accounts payable takes a concerted effort from personnel in the AP department. Here are some of the most important tasks team members must complete to facilitate the AP process: 

1. Maintain vendor data: Managing vendor data involves recording all vendor information, such as contact details, banking information, and tax ID numbers, among other necessary details. Accurate and up-to-date vendor information ensures that AP teams pay the right vendor promptly while also filling out the correct tax-related documents. 
2. Verify vendor invoices and account assignments: Once your team updates the vendor master record, it’s time to verify the invoices received from the vendor. The team checks that the invoice is accurate and complete, that the vendor has provided all necessary documentation, and that the pricing and payment terms are correct. Once verified, a team member will assign the invoice to the appropriate account, usually based on the business unit or project.
3. Enter vendor invoices: The next step in the accounts payable process is accurately entering the vendor invoice into the system. This process involves entering all relevant information into the accounting system, such as the invoice date, amount due, and payment terms specified. The entry triggers the creation of an open item in the system, which the team will use to track the invoice status.
4. Manage open items: The accounts payable team manages open items, which are essentially unpaid invoices. They maintain a list of all open items, ensuring that the company pays the invoice on time and that they record the payment status accurately in the accounting system. This task involves monitoring payment deadlines and reconciling discrepancies to ensure prompt payment.
5. Make payments and settlements: The accounts payable team is responsible for making payments and settlements based on the open items list. The vendor sets payment terms with the business in advance, and the accounts payable team is responsible for ensuring timely payments. They also handle any disputes or issues that may arise during the payment process and manage the settlement of invoices with vendors.

For anyone interested in finding an accounts payable professional or becoming an AP professional, this section will be helpful to you. Accounts payable professionals manage or execute functions related to paying outstanding invoices on behalf of a company. Their main goal is to ensure timely invoice payment, foster positive relationships with the company's suppliers, and facilitate the appropriate allocation of cash payments to keep the business running smoothly. 

What are the Main Job Duties of Accounts Payable Professionals?

Some of the main job duties associated with accounts payable professionals include: 

• Processing and verifying invoices
• Routing invoices for approval and reminding approvers when they forget to sign an invoice
• Scheduling and preparing payments 
• Fixing any issues related to invoices or payments 
• Complying with the latest AP policies and regulatory requirements 
• Generating finance reports 
• Managing vendor payment communications
• Reconciling accounts 
• Assisting with audits 

Types of Accounts Payable Jobs

Some of the most popular AP jobs include: 

• Accounts Payable Clerk
• Accounts Payable Specialist
• Accounts Payable Supervisor 

We've listed the above professionals based on their responsibilities, with accounts payable clerks being the most hands-on and operational (usually entry-level).

Qualities of a Good AP Professional

Those who tend to do well in AP-related positions exhibit the following qualities: 

• Accounting qualifications: holds a degree in finance, accounting, or a related discipline or an accounting certification
• Familiarity with accounting software
• A knack for numbers 
• A basic understanding of accounting principles and functions 
• The ability to work independently 
• Problem-solving capabilities

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What is Accounts Payable (AP) Automation?

Accounts payable (AP) automation involves utilizing technology to streamline and modernize your AP functions. It involves using software with specialized features to reduce human error and create more efficiencies throughout the AP workflow. 

What are the Benefits of Automating Accounts Payable (AP)?

By automating the accounts payable process, businesses can reduce errors, increase productivity, and ensure regulatory compliance. In turn, an optimized AP workflow can help improve financial accuracy, build trust with suppliers, and maintain a healthy bottom line. Here are some of the most popular benefits of automating the accounts payable process:

More Cost Savings. 

Automating the accounts payable process reduces labor costs by digitizing manual processes like invoice processing and data capture. The result is a new streamlined workflow that minimizes duplicate invoices, bolsters the bottom line (by taking advantage of more early payment discounts and credit card rebates), and eliminates late payment fees. 

Better Cash Flow. 

Automating the accounts payable process helps teams better understand their company's cash requirements. It also delivers the necessary visibility for AP teams to strategically prioritize the activities that most affect their cash flow. Lastly, automating AP optimizes cash flow by enabling teams to take better advantage of dynamic cash discounting, where teams pay their supplier invoices early in exchange for a discount.

Stronger Vendor Relationships. 

Thanks to their centralized digital platforms, automated accounts payable processes make it easy to handle vendor queries, open items, and approvals. This framework works on computers, tablets, and phones, so employees can work from anywhere while always following corporate security standards. By taking prompt action and communicating with vendors, businesses can improve their goodwill and long-term relationships, which are crucial for growth.

Clearer Visibility. 

An integrated AP automation system captures, validates, and efficiently routes invoice data, ensuring accurate organization and recording of all payables. This system provides enhanced visibility and accountability throughout the entire AP workflow, enabling management to promptly identify and address any issues that may arise.

Moreover, the finance team, other departments, and vendors can conveniently access their relevant invoices and payment records through self-service. This minimizes the need for time-consuming back-and-forth communication.

More Secure Internal Controls. 

Accounts payable automation solutions provide a clear audit trail for every transaction, making it easier to detect and prevent fraudulent activities. They also enforce strict approval workflows to prevent unauthorized transactions. 

With features like role-based access control and secure data storage, AP automation solutions offer robust security measures to streamline processes, strengthen security, and protect sensitive financial data. 

Quality Improvement. 

AP automation reduces the chance of data entry errors, payment delays, and other mistakes by eliminating redundant, manual tasks that require human intervention. 

Automation also reduces turnaround times and enables organizations to access real-time data to quickly reveal potential problems with vendors. These benefits lead to better accuracy and more efficiencies across the AP workflow.

Operational Flexibility. 

Accounts payable automation offers finance teams greater operational flexibility by streamlining and simplifying their processes. Moreover, features like real-time reporting and analytics allow finance teams to quickly adapt to changing business needs and make more informed decisions, enhancing their agility and responsiveness. 

It's also important to note that unlike adding AP headcount, AP automation solutions like Centime can quickly scale with business growth without the hefty price tag and extended onboarding timelines. Teams can also quickly adapt their platform to meet new needs in the event of a company merger or acquisition. 

How to Measure Accounts Payable Automation: The AP Turnover Ratio 

In order to effectively manage cash flow and maintain good relationships with vendors, it's important to measure AP regularly. There are several KPIs that AP teams use to measure their performance. The accounts payable turnover ratio is one of the most common metrics. You can use this ratio to calculate a company's short-term liquidity by measuring how quickly it pays off its vendors. 

The formula for calculating the accounts payable turnover ratio is:

AP Turnover Ratio = Total Purchases / Average Accounts Payable

The ratio indicates the number of times a company pays off its accounts payable during a specific window - usually a year. A high ratio means that a firm is quickly paying off its debts, while a low ratio indicates that they're taking longer to pay. 

High AP Ratio

A high accounts payable turnover ratio generally suggests that a company manages its cash flow effectively. It means the team quickly pays its vendors, which can help build strong relationships and even lead to discounts or better terms on future purchases. It also means they aren't tying up too much cash in outstanding debts, which can limit their ability to invest in growth opportunities.

Low AP Ratio

On the other hand, a low accounts payable turnover ratio can indicate that a firm is struggling to pay off its debts. This could be due to factors such as poor cash flow management, slow sales, or excessive debt. A low ratio can also make it more difficult for them to negotiate favorable terms with vendors, as suppliers may be less willing to extend credit if they are not confident in the company's ability to pay.

By regularly evaluating this ratio, businesses can gain insight into their short-term liquidity, optimize their cash flow management and strengthen strategic vendor relationships.

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What Features are Important in an Accounts Payable Software Solution?

There are many accounts payable software solutions available today. How do you separate the best from the rest and choose the right option for your business? It's all about the software features. Some of the top features of AP automation software like Centime include:

1. Real-time cash flow forecast (*Bonus feature only available through Centime*): A 13-week cash flow forecast that allows businesses to see the impact of their payables in real time. This helps businesses make more informed decisions about when and how to pay their suppliers.
2. Automated payment processing: AP software automates the accounts payable payment process, which removes manual data entry. This saves time and minimizes human errors.
3. Invoice scanning: AP software includes invoice scanning, which captures and extracts header and line-level data from invoice documents. This makes it easier to process and approve invoices quickly and accurately.
4. Automated invoice approval process: AP software automates the invoice approval process by routing your invoices based on predefined rules for verification and approval. This ensures consistent payment authorization and adherence according to company policies and procedures.
5. Self-service supplier onboarding: AP software provides self-service supplier onboarding, which makes it easier for suppliers to submit invoices and receive payments. This can help to build stronger relationships with suppliers and improve efficiency.
6. Payment control for fraud prevention: AP software ensures segregation of duties and supports proper payment control for fraud prevention. This helps to reduce the risk of fraud and errors, which can be costly for businesses.
7. Payment optimization: AP software incorporates payment discount optimization, secure payment methods, and automatic payment reconciliation. These all help businesses save money and improve efficiency.
8. Disburse payments of all types: AP software lets you disburse payments using ACH transactions, wire transfers, and checks. This gives businesses more flexibility and control over their cash flow.‍
9. Automated remittance information. AP software automatically sends remittance information to vendors when payments are scheduled and executed. This helps to improve communication and build stronger relationships with suppliers.