What Is Accounts Payable?
For anyone who is new to the space, we're starting off with a comprehensive overview of accounts payable. In the simplest sense, the job of the accounts payable department is paying the bills. However, there is a lot to manage in the process of paying those bills.
Large and small companies regularly order and receive goods and services before paying for them. This is called purchasing “on credit” or “on account.” The purchase is not a loan in a traditional sense, however, because the seller is giving something away expecting a payment later on. Rather, it is a form of credit.
In this relationship, the supplier—also called a vendor or seller—is considered a creditor. The company that is buying the goods and service—the customer—is acting as a borrower, albeit for a very short period of time.
Accounts payable and accounting go hand-in-hand working through the accountings payable process, so we’ll unpack some accounting terminology as we go.
When a business buys on credit without signing a promissory note, the value of the purchase is recorded in the accounts payable liability account, sometimes called trade payables.
Accounts payable departments generally carry a credit balance at all times in large organizations.
It is financially beneficial to get paid as quickly as possible and delay your payments as long as possible, so it is not uncommon for businesses to negotiate payment terms well over 30 days in the future. As long as the balance does not grow beyond the business’s ability to pay, owing money and accruing an accounts payable balance is a good thing. As long as you follow all the agreed-upon contract terms, there is nothing wrong with seeing a number other than zero on your accounts payable account.
Whenever a vendor invoice is recorded to accounts payable, a balance sheet account, the accounts payable account will be credited. For double entry accounting purposes, a debit must be added somewhere else at the same time. Typically, for businesses ordering physical goods, the inventory account is debited. In the event the order was for a service, an expense account is debited. When a payment is made in the future, accounts payable is debited and cash is credited.
At any given time, the company’s accounts payable balance is equal to the invoices received and recorded, but not yet paid.
Businesses can operate under two accounting methods: cash accounting and accrual accounting.
Most businesses big enough to have an AP staff operate under the accrual method of accounting. Under accounting rules, which are known as Generally Accepted Accounting Principles (GAAP), companies operating with the accrual method must report the liability no later than the date the goods were received or the service was performed. The expense or asset is recorded on the same calendar date as the liability.
Under accrual accounting, expenses and assets are recorded in the same period they occur, which is commonly not when the bill is paid.
Accounts payable can refer to a general ledger account or a person or team of people who processes invoices and payments. The term can be used in many different ways, but typically when used in conversation, it is appropriate to refer to “accounts payable” for both. Most of the time when people make calls or send emails to accounts payable, they are referring to the people who work on invoice processing, not the general ledger account.
As long as the balance does not grow beyond the business's ability to pay, owing money and accruing an accounts payable balance is a good thing.
Leadership Roles of the AP Department
Every business is unique. Depending on the size and structure of the organization, AP departments and roles can be vastly different.
Next we are going to look at several common leadership roles that have oversight in the AP process. These are general descriptions, and the actual roles may look very different or not even exist at your company. If you are in a growing organization, these may be useful roles to fill as the company’s needs expand.
Chief Financial Officer (CFO) – The CFO is the top financial leader at the company. A CFO’s responsibilities can be broken down into three primary buckets: controllership, treasury, and economic strategy and forecasting. Teams reporting to the CFO project the long-term financial view of the company. In many cases, the success of these forecasts and models can determine the success or failure of the entire company. For accounts payable, the CFO’s responsibilities are typically high-level and focus on the big picture and strategy.
Controller – The controller is the company’s top accountant. You can think of this person as the Chief Accounting Officer, who typically reports directly to the CFO. The controller has oversight on the company’s accounts payable functions in addition to many others, some of which tie in closely to AP like the general ledger and cost accounting. Other responsibilities typically include overseeing financial statements, payroll, budgeting, tax compliance, and accounts receivable.
AP Manager – An accounts payable manager can be a solo accounts payable department of one, or an accounts payable manager can lead a team of accounts payable clerks, processors, and bookkeepers. The AP manager is focused on the day-to-day accounts payable operations. Responsibilities may include managing payroll, employee reimbursements, vendor payments, and monitoring any other cash going out the door.
The workers in the AP department, typically the previously mentioned AP clerks, processors, and bookkeepers, generally report to the AP manager, who directs their day-to-day operations. The overall workflow and strategy for dealing with AP is mostly led by this finance and accounting leadership team.
Sometimes the AP processor’s tasks are completely manual, and sometimes they are completely automated with electronic AP solutions, but most of the time it is a combination of the two. Over the last decade, there has been a major push by business leaders and executives to further automate the AP lifecycle to improve processing times, increase accuracy, and lower costs.