Can the bookkeeping services and accounts payable services of a professional bookkeeper help business owners to better understand and manage their accounts payable?
Wikipedia defines Accounts payable as “money owed by a business to its suppliers and shown as a liability on a company's balance sheet. It is distinct from current liabilities, which are debts created by formal legal instrument documents.”
AccountingTools.com explains it as follows: “Accounts payable is an entity's short-term obligation to pay suppliers for products and services, which the entity purchased on credit.
If accounts payable are not paid within the payment terms agreed to with the supplier, the payables are considered to be in default, which may trigger a penalty or interest payment, or the revocation or curtailment of additional credit from the supplier.“
So, why should all business owners understand their accounts payable? Yes, you guessed it, bills that come in must be paid and anything that is paid out is a liability.
Utilizing the bookkeeping services of a professional bookkeeper can help business owners and business professionals to not only understand their accounts payable but also when it is due, how much is due and how it will affect their organizations cash flow. In this way, bookkeeping services and accounts payable go hand in hand.
Professional bookkeepers have a unique mindset – they are unlike the majority of the humans on earth. They actually get excited about balancing a checkbook, working out a budget or performing a bank reconciliation.
These are just a few of the reasons why using professional bookkeeping services can help you to understand your accounts payable. Also, the bookkeeping services of a professional bookkeeper will help you to keep track of all your daily, monthly, quarterly and annual financial transactions, and this is vital to the success of any growing concern.
An accounts payable is recorded in the Account Payable sub-ledger at the time an invoice is received and vouchered for payment. Vouchered, or vouched, means that an invoice is approved for payment and has been recorded in the General Ledger or AP sub ledger as an outstanding, or open liability because it has not been paid.
Payables are often categorized as Trade Payables and Expense Payables. Trade payables are defined as follows by AccountingTools.com: “A trade payable is an amount billed to a company by its suppliers for goods delivered to or services consumed by the company in the ordinary course of business”
Deductible Expense Payables on the other hand are payables for the purchase of goods or services that are expensed. Common examples of Expense Payables are advertising, travel, entertainment, office supplies and utilities. A/P is a form of credit that suppliers offer to their customers by allowing them to pay for a product or service after it has already been received.
Suppliers offer various payment terms for an invoice. Payment terms may include the offer of a cash discount for paying an invoice within a defined number of days. For example, 2%, 30 Net 31 terms mean that you, the business owner, may deduct 2% from the invoice if payment is made within 30 days. However, if payment is made on day 31 then the full amount has to be paid.
In a business, there is usually a much broader range of services in the A/P file, and bookkeepers usually use accounting software to track the flow of money into this liability account when they receive invoices and out of it when they make payments.
Commonly, a supplier will ship a product, issue an invoice, and collect payment later, which describes a cash conversion cycle, a period of time during which the supplier has already paid for raw materials but hasn't been paid in return by the final customer.
When the invoice is received by the purchaser it is matched to the packing slip and purchase order, and if all is in order, the invoice is paid. This is referred to as the three-way match. The three-way match can slow down the payment process, so the method may be modified.
For example, three-way matching may be limited solely to large-value invoices, or the matching is automatically approved if the received quantity is within a certain percentage of the amount authorized in the purchase order.
In the area of business bookkeeping services and accounts payable this cliché fits in quite well since many business owners handle their own bookkeeping. We frequently hear “I’ve been doing it for years like this.”
However, before they know it running their business demand so much of their time and attention that maintaining a good set of books becomes totally overwhelming. Now the system brakes down rapidly and needs to be fixed fast.
The simple answer is to consider the bookkeeping services of a professional bookkeeper as now there is something to fix. Bookkeepers do this full time and because they have their bookkeeping software and systems in place they may be able to do it at a fraction of the time and cost it took you, the business owner to do.
Did you know that accounts payable are considered a source of cash? Yes, since it represents funds being borrowed from suppliers, accounts payable are considered a source of cash.
This all changes when accounts payable are paid, then it is a use of cash. Given these cash flow considerations, you understand why suppliers have a natural inclination to push for shorter payment terms, while business owners (creditors) want to lengthen the payment terms.
Initially, only the words “Accounts Payable” needs to appear on a Chart of Accounts. When you start making purchases from suppliers (vendors), each vendor will appear in its own space under the title of accounts payable. An account opens as soon as you receive a bill for services rendered.
Another thing regarding bookkeeping services and accounts payable - There are two methods available to pay bills:
Knowing and understanding your businesses’ financial situation your bookkeeper will consult you on your businesses bookkeeping services and accounts payable philosophy and setup your accounts payable system accordingly. This helps to keep money available within the business for a longer period and also allows time to raise money if it is not immediately available.
From the above you now know how valuable
bookkeeping services and accounts payable services of a professional bookkeeper are in ensuring that your
financial house is in order, specifically as how it relates to your accounts
payable. It is clear how essential it is to have accurate bookkeeping services and accounts payable records
to ensure that suppliers are paid on time and liabilities are recorded in full
and within the correct time periods. Without up to date and correct accounts
payable records your suppliers may not get paid in time and your good credit
history will be just that, history.
Stephanie Horne is an experienced bookkeeper and Enrolled Agent. She is the owner and founder of Tax Avail, Inc. in Rohnert Park, California along with this website and has over 20 years of in person, virtual and outsourced bookkeeping/accounting and tax preparation experience with businesses of all sizes.
Her love and passion is to work individually with business owners and families to help alleviate any financial stress or concerns by helping them to understand and have better control of their income, expenses, cash flow, and tax liabilities.