to answer the questions what is the full cycle for accounts payable, the cycle allows business leaders to closely monitor newly authorized expenses. In doing so, management has an opportunity to control cash flow, correct any inaccuracies, and protect its credit rating. Large businesses with several monthly AP transactions often create an accounts payable department whose primary responsibility is to coordinate the organization’s accounts payable functions.
An accounts payable cycle requires personnel to execute the following steps when processing accounts payable transactions:
- Confirm receipt of goods or services;
- Verify approval using a purchase order or other authorization document;
- Confirm the invoice amount for accuracy;
- Prepare and complete check run for amount due;
- Mail the check;
- Record the accounts payable transaction in the general ledger.
The following sections briefly explains these processes as well as some of the advantages to implementing them in your business.
Verify the Invoice Amount and Payment Authorization
Upon receipt of the invoice, the accounts payable department (or personnel) immediately confirms the accuracy of the billed amount as well as receipt of billed product and/or services. In smaller organizations, this may be as simple as verbally confirming approval with the appropriate purchaser of the product or service. In larger corporations, the accounts payable department usually works with purchasing to ensure the validity of debt obligations prior to processing payment.
Preparing for the Check Run
Once the invoiced amount is confirmed, the accounts payable department enters the payable in the accounting system for future payment. Prior to processing payment, the AP department first confirms open invoices are in the system and cleared for payment. Standard payment terms are net 30 but these may vary depending on specific business needs and any existing vendor agreements. Accurate data entry is a key component of this step in the process as this will eliminate costly errors such as over-payments, late charges, or stop payment fees because payment was mailed to the incorrect mailing address.
Record the Entry in the General Ledger
Once the check run is completed, the AP transaction is manually or automatically recorded in the accounts payable ledger until the month, quarter, or year-end closing process begins. An accounts payable ledger is used to record accounts payable entries. This ledger lists the date of the transaction, vendor name, purchase order number (if applicable), and invoices paid. This information will later be used to prepare annual 1099s, which are forms mandated by the IRS to disclose total vendor payments exceeding $600–unless your company has an applicable vendor W-9 on file. To learn more about this requirement, please visit the IRS website. To see an example of a general ledger, downland Bright Hub’s Accounts Payable Ledger Template now.
Things to Remember
The following list summarizes the full cycle of the accounts payable process for immediate use when implementing these steps in your business setting:
- Audit invoices for approvals
- Confirm billed amount is an authorized expenditure
- Verify authorized amount matches amount in approving document
- Process check run using approved amount
- Mail check
- Prepare monthly, quarterly, and annual accruals as appropriate
- Prepare 1099s
Remember, in a competitive environment, it is essential for management to properly control expenses as much as possible. One way to do so is by learning what is the full cycle for accounts payable and implementing a process that encourages accuracy, controlled spending, and financial sustainability. To learn the top 7 accounts payable practices, please read Accounts Payable Best Practices.
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