How to Manage Accounts Payable
Accounts payable (A/P) is the money you owe vendors who have provided you with goods and/or services on credit. It’s important to stay on top of your bills because, if you don’t, it could lead to cash flow issues and penalties for late payments, and it could even affect your ability to order products and services on credit.
If you’re currently using a manual accounting system to manage accounts payable and other financial records, you can save time and energy by using an accounting software like QuickBooks. QuickBooks allows you to track all unpaid bills and make payments directly with a check or online bill payment so that your accounts payable balance is always up to date. Sign up for a free 30-day trial or a discount off a paid subscription to get started with QuickBooks.
Manage Accounts Payable for Services
When you purchase services like consulting or legal services, the accounts payable process is just slightly different from what takes place when you purchase a product. Generally, sometime after your vendor has provided you with their services, you receive the bill in the mail. Once you receive your vendor bill, you should take the steps to verify the accuracy of what you have been billed.
The invoice verification process typically involves checking that the number of hours billed, hourly rate and description of services are accurate. Once you are satisfied that the invoice is correct, it then needs to be recorded on your books and scheduled for payment. If you use accounting software like QuickBooks, then this process is very simple. We will discuss how to this works in QuickBooks later on.
However, if you do not use an accounting software like QuickBooks and you manually keep track of your bills, you have to create a journal entry to record your payment, and then set up a filing system to schedule the bill for payment. We discuss the process to manage accounts payable using a manual system vs. an accounting software in more detail later on.
Manage Accounts Payable for Products
The accounts payable process for products involves a few more steps and a few more documents than the accounts payable process for services. Purchasing products on credit will generally include four steps. Listed below are the four steps required when purchasing products on credit.
Place Order for Products
When placing an order from a supplier for product, you should create a purchase order (PO) and send it to your vendor. A purchase order is a document created by a buyer to place an order for goods with a supplier. In general, purchase orders include a description of the items, the quantities for each item and the agreed-upon price of each item.
Receive Products into Inventory
Once the products arrive, you should verify that the order is correct. To do so, you should use a receiving document to record the quantities of each item received. In QuickBooks, we can do this easily by going into the receive inventory window and entering the purchase order number. At that point, you confirm that everything on the purchase order matches what was received. If it was not, then you would change the quantities to reflect what was actually received.
If you are doing this manually, then you should use a receiving document to record the quantities of each product received. See if there’s a packing slip included in the box, which includes a list of the products and quantities that were shipped. Verify that what is on the packing slip is actually in the box. Once you do that, you can use this document as your receiving document. At this point, you could compare your receiving document to the purchase order. However, we are going to discuss how to match these up in the three-way match step below.
Receive Vendor Invoice
Some suppliers will put their invoice in the box along with the packing slip and your products while other suppliers will mail or email the invoice separately. At any rate, once you receive the invoice, you have everything you need to start the verification process, also known as the three-way match.
Utilize Three-way Matching
The three-way match involves comparing the purchase order, inventory receipt and vendor invoice to verify that the goods ordered were, in fact, received and that you were charged the agreed-up amount for each item.
Compare the Purchase Order to the Inventory Receipt Document
To perform the match correctly, you want to start by comparing the purchase order and the inventory receipt document. Make sure that each item that was ordered was received. If there are any discrepancies between the products ordered and/or received you need to contact the supplier immediately. I recommend making a phone call first and then follow up with an email so that you can have adequate documentation.
Compare the Inventory Receipt Document to the Vendor Invoice
After you have compared the PO to the inventory receipt document, you can compare the inventory receipt and the PO to the vendor invoice. First, verify that the items and quantities billed match up to the inventory receipt document. If they do, then you can compare the cost of each item on the PO to what you were billed on the invoice.
If there are any discrepancies in quantities or price, you need to contact the vendor ASAP. Again, make the phone call and then follow up with an email for written documentation. If you do find a discrepancy with the products or the price, depending on the issue, there are a few ways to resolve it:
If you’re currently using a manual accounting system to manage accounts payable and other financial records, you can save time and energy by using an accounting software like QuickBooks. QuickBooks allows you to track all unpaid bills and make payments directly with a check or online bill payment so that your accounts payable balance is always up to date. Sign up for a free 30-day trial or a discount off a paid subscription to get started with QuickBooks.
Manage Accounts Payable for Services
When you purchase services like consulting or legal services, the accounts payable process is just slightly different from what takes place when you purchase a product. Generally, sometime after your vendor has provided you with their services, you receive the bill in the mail. Once you receive your vendor bill, you should take the steps to verify the accuracy of what you have been billed.
The invoice verification process typically involves checking that the number of hours billed, hourly rate and description of services are accurate. Once you are satisfied that the invoice is correct, it then needs to be recorded on your books and scheduled for payment. If you use accounting software like QuickBooks, then this process is very simple. We will discuss how to this works in QuickBooks later on.
However, if you do not use an accounting software like QuickBooks and you manually keep track of your bills, you have to create a journal entry to record your payment, and then set up a filing system to schedule the bill for payment. We discuss the process to manage accounts payable using a manual system vs. an accounting software in more detail later on.
Manage Accounts Payable for Products
The accounts payable process for products involves a few more steps and a few more documents than the accounts payable process for services. Purchasing products on credit will generally include four steps. Listed below are the four steps required when purchasing products on credit.
Place Order for Products
When placing an order from a supplier for product, you should create a purchase order (PO) and send it to your vendor. A purchase order is a document created by a buyer to place an order for goods with a supplier. In general, purchase orders include a description of the items, the quantities for each item and the agreed-upon price of each item.
Receive Products into Inventory
Once the products arrive, you should verify that the order is correct. To do so, you should use a receiving document to record the quantities of each item received. In QuickBooks, we can do this easily by going into the receive inventory window and entering the purchase order number. At that point, you confirm that everything on the purchase order matches what was received. If it was not, then you would change the quantities to reflect what was actually received.
If you are doing this manually, then you should use a receiving document to record the quantities of each product received. See if there’s a packing slip included in the box, which includes a list of the products and quantities that were shipped. Verify that what is on the packing slip is actually in the box. Once you do that, you can use this document as your receiving document. At this point, you could compare your receiving document to the purchase order. However, we are going to discuss how to match these up in the three-way match step below.
Receive Vendor Invoice
Some suppliers will put their invoice in the box along with the packing slip and your products while other suppliers will mail or email the invoice separately. At any rate, once you receive the invoice, you have everything you need to start the verification process, also known as the three-way match.
Utilize Three-way Matching
The three-way match involves comparing the purchase order, inventory receipt and vendor invoice to verify that the goods ordered were, in fact, received and that you were charged the agreed-up amount for each item.
Compare the Purchase Order to the Inventory Receipt Document
To perform the match correctly, you want to start by comparing the purchase order and the inventory receipt document. Make sure that each item that was ordered was received. If there are any discrepancies between the products ordered and/or received you need to contact the supplier immediately. I recommend making a phone call first and then follow up with an email so that you can have adequate documentation.
Compare the Inventory Receipt Document to the Vendor Invoice
After you have compared the PO to the inventory receipt document, you can compare the inventory receipt and the PO to the vendor invoice. First, verify that the items and quantities billed match up to the inventory receipt document. If they do, then you can compare the cost of each item on the PO to what you were billed on the invoice.
If there are any discrepancies in quantities or price, you need to contact the vendor ASAP. Again, make the phone call and then follow up with an email for written documentation. If you do find a discrepancy with the products or the price, depending on the issue, there are a few ways to resolve it:
- The supplier will ship you the missing goods
- The supplier will ship a replacement for a product that was damaged en route
- The supplier will issue you a credit memo for any price discrepancy; a credit memo is a document that you can use as a credit against a future payment to your supplier
Once you are satisfied that the invoice is accurate, then it needs to be recorded on the books and scheduled for payment. Later on, we will discuss how easy this process is when you use accounting software.
Manage Accounts Payable Using a Manual System vs. Accounting Software
The first part of the accounts payable process is to verify that the vendor has billed you for the right products and/or services that you received. Once that verification is complete, then it is time for you to record the invoice on the books and schedule it for payment. Listed below are the steps on how to do accounts payable in QuickBooks vs. a manual system.
Record the Invoice on the Books
Recording an invoice on the books generates a credit to the accounts payable account and a debit to an expense account or asset account (depending on what was purchased). Depending on whether or not you are doing this manually or using an accounting program like QuickBooks determines what steps you take next.
Recording Invoices with Accounting Software
Using an accounting software program like QuickBooks really makes things much easier. To record your vendor bill in QuickBooks, you simply go to the Enter Bills window and enter the information from the paper bill that you received from your vendor into QuickBooks. When you save the bill, QuickBooks debits an expense or asset account and credit accounts payable behind the scenes:
- Debit Expense Account or Inventory Asset Account
- Credit Accounts Payable
Recording Invoices with a Manual System
If you don’t use an accounting software like QuickBooks, and you need to record the invoice manually, then you need to record a journal entry. A journal entry is a manual way to record business transactions like vendor bills. It should include an effective date, debit amount and credit amount. To learn more about what a journal entry is and how to create one, check out this article from Accounting Tools.
The journal entry that you record is exactly the same as the journal we discussed in the previous QuickBooks section. Let’s say that you need to record a journal entry for $50 for office supplies that you purchased from Staples but have not paid for.
Schedule the Invoice for Payment
It’s important to pay your bills on time so that you maintain good credit with your vendors. Accounting software makes it easy to keep track of bill due dates because the software reminds you that a bill is coming due. While you can definitely keep track of your bill due dates using an email program or another system, it’s just a bit more time-consuming to do so.
Schedule Invoice for Payment with Accounting Software
Entering the invoice in QuickBooks not only records it in your books but it also schedules the invoice for payment based on the payment terms you entered when you set up the vendor. Setting up a vendor in QuickBooks involves entering basic information, such as the vendor’s name, remit to address and payment terms. You can watch our tutorial video on How to Set Up Vendors In QuickBooks Online.
Entering payment terms for a vendor is very important because it will create a reminder from QuickBooks that the invoice due date is approaching. In addition, if your supplier offers a discount if you pay early, you can set up the invoice with those terms so that you don’t miss the due date to take the discount. We talk more about how to get early discounts from your vendors in the best practices for bill payments section.
Schedule Invoice for Payment with Manual System
If you are manually processing accounts payable, then you can use something as simple as one accordion file with at least 30 slots and a dozen expandable folders. Label each expandable folder with one of the 12 months. When you receive a bill from a vendor, file it in the expandable folder for the month that it is due. For example, if you receive a bill and the due date is 2/15 then it goes in the February folder.
On the first day of each month, take the bills out of the expandable folder for that month and file them in the accordion folder (which represents the days of the month) based on their actual due date. Using the same example above, our 2/15 bill would be filed in the accordion file under day 15.
If a bill has an early discount due date, then you would file it using that date in order to take the discount. Every week, you should review and prepare checks (or set up online payments through your bank) for bills due the following week. Be sure to check out our Small Business Bookkeeping, Accounting, & Tax Guide for tips on how to keep your paperwork organized.
Best Practices for Bill Payments
Keeping track of the money going out of your business is just as important (if not more important) as keeping track of the money coming in. In my experience, I have managed accounting teams in very large organizations, and I’ve also run my own consulting business.
Impact of Accounts Payable on Financial Statements
In the previous section, we discussed the journal entry that is generally recorded when you enter a bill. In this section, I would like to discuss the journal entry that you need to record once you pay a bill and the impact both of these have on the financial statements. Let’s walk through some accounts payable examples to see how this works.
The Bottom Line
By now, I hope I have convinced you that managing the money going out the door is just as important as the money coming in from your customers. By using accounting software rather than a manual system, you will save time and maintain good credit with your vendor suppliers.
With QuickBooks, you can keep track of your vendors, open bills and paid bills easily. Setting due dates for each invoice and reviewing the accounts payable aging report ensures that you never miss a payment. Sign up for a free 30-day trial of QuickBooks so that you can see how easy it is to manage your accounts payable.
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