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Accounts Payable (AP) plays a crucial role in maintaining the financial statements of a business. For accurate and complete financial statements, the way Accounts Payable balances are recorded needs to be precise.
Read as we take a deep dive into the definition, Accounts Payable process and cycle, its automation, and more.
What is Accounts Payable
When a business buys goods or services from a vendor or supplier, on credit that has to be paid in a short interval, the accounting entry made is called Accounts Payable.
This means, it is the amount that is payable against an invoice sent by the vendor. It is treated as a current liability because the purchase of goods and services takes place without an upfront payment, which means the purchase is made on credit.
The payment is generally made within 30 days from the purchase. And, the expense is documented as a short term liability on the business’s balance sheet.
Importance of Accounts Payable
The management of Accounts Payable is critical for all businesses. Here’s why. The AP process takes care of timely payments, which in turn, establishes strong credit and lasting relationships with vendors.
The process tallies the total amount owed with the vendor invoices, ensuring payments without the worry of an invoice getting skipped or getting paid more than once. An efficient AP process sees to it that there aren’t any penalties for late payments, overdue, or late fee.
Businesses can manage and track their cash flow in a much better way by paying invoices only when they are due or paying the vendor early to avail a discount, etc.
Any miscalculation will result in erroneous financial statements, and the business can incur a loss, especially if the numbers are large.
Accounts Payable process
The Accounts Payable process involves five steps.
- Receiving the invoice
- Reviewing the invoice details
- Updating records upon receiving the invoice
- Making timely payment after deducting TDS
- Depositing TDS to the government
The AP process is based on the number of vendors and suppliers, the volume of payments to be processed, and the type of financial reports the business requires. The process also depends on the size of the organisation.
A smaller business will have to deal with a fewer number of invoices on a monthly basis when compared to a larger business. The process becomes more elaborate in terms of setting up guidelines and procedures to make vendor payments.
Step 1: Receiving the invoice
During this step, the quantity of goods received from the vendor is marked against the invoice details. The validity of the invoice is also recorded.
Step 2: Reviewing the invoice details
Next, details of the invoice, like the name of the vendor, date, requirements, authorisation, etc., are recorded. The records are then verified and matched with the purchase order.
Step 3: Updating records upon receiving the invoice
Further, all the ledger accounts are revised based on the invoices received by the business. An expense entry is made, which might need approval from the finance manager.
Step 4: Making timely payment after deducting TDS
All the invoice payments are processed on or before the due date, and supporting documents are created. The vendor’s ledger account is closed in the book of accounts after deducting TDS and making the payment.
Step 5: Depositing TDS to the government
Finally, the deducted TDS is paid by the business to the government on or before the due date.
Role of Accounts Payable
AP deals with more than just paying the incoming invoices.
- Internal payments: Accounts Payable is involved in making internal payments within the organisation like reimbursements, supervising and controlling cash flow, and more.
- Vendor payments: Management of vendor information, invoices, and tax payments are also overseen by AP. Usually, the finance team maintains records on files or spreadsheets, makes invoice payments as well as TDS payments to the government.
- Other responsibilities: Since the finance team has an overview of the entire money movement of the organisation, they are also responsible for developing strategies to reduce costs and ease up cash flow.
Automate your Accounts Payable with RazorpayX
Many businesses think that choosing and impelling a new AP process is expensive and time-consuming. With RazorpayX Vendor Payments, the process is no longer daunting. Businesses can now automate their invoice to pay cycle, from start to finish.
No more maintaining spreadsheets to store and track invoices. No more manual TDS calculations.
Here’s how businesses can automate their Accounts Payable.
- Without having to go through multiple platforms, businesses can carry out their entire process on one single platform
- A smart and highly-responsive dashboard takes the place of several spreadsheets
- Our intelligent OCR reads the uploaded invoices and populates the details automatically. So, no more data-entry mishaps
- All payments will be made on time because we send timely reminders
- Add any number of vendors and make payments instantly, without waiting out the cooling period
- Apply filters on name, due dates, and more and pay multiple invoices in one click
- RazorpayX Vendor Payments automatically deducts TDS from the invoices and pays the government
Experience seamless money movement like never before with RazorpayX.