What Is Accounts Payable in ERP and Accounting?

What Are Accounts Payable in Accounting and Why Knowing Matters

Simply put, accounts payable (AP) is the record of short-term obligations a business owes suppliers for goods and services they’ve already received but have not yet paid for. Managing the accounts payable process effectively ensures long-term benefits in:

• Cash flow.
• Supplier relationships.
• Reporting accuracy.
• Internal controls.
• Efficient data movement through an ERP system.

Today’s employers, owners, and finance leaders working to create thriving businesses must elevate accounting and its many processes, including accounts payable, to their proper place of importance. As Tilman J. Fertitta, former Chairman and CEO of Landry’s Inc., is quoted as saying, “Don’t ever let your business get ahead of the financial side of your business. Accounting, accounting, accounting. Know your numbers.”

To help your business know its numbers, here’s a look into the accounts payable process and an overview of how to make it efficient and profitable.

How Accounts Payable Works, From Invoice Receipt to Final Payment

Accounts payable records aren’t just balance-sheet line items, though that’s where the information resides as a current liability. They’re part of an end-to-end workflow that makes sure outstanding payments for suppliers, contractors, subscription services, utilities, professional services, and maintenance are paid accurately. They also ensure payments are made on time, which is dependent on negotiated repayment terms (e.g., 30, 45, 60, or 90 days).

What Are the Core Steps in a Modern Accounts Payable Workflow?

The steps to the accounts payable workflow are straightforward.

1. Receive an invoice from the supplier and enter the information (e.g., vendor name, invoice number, date, total amount due, etc.) into the accounting or ERP system.
2. Review the invoice to ensure it corresponds correctly with the purchase order (PO).
3. Approve the invoice once the invoice information has been verified; this includes routing the invoice to the proper personnel.
4. Handle exceptions that arise when invoices are flagged for errors, such as duplication, fraud, or incorrect or unauthorized charges.
5. Authorize payment after the invoice is approved.
6. Process the payment via checks, ACH transfers, wires or credit cards.
7. Record the payment with proper double-entry bookkeeping procedures.
8. Analyze how quickly the invoice was processed and paid, gathering insights for improving the accounts payable workflow.

When accounts payable are managed efficiently, with each step flowing seamlessly into the next, the streamlined process protects the business from making late payments, enhances credit scores, improves vendor relationships, and gives businesses an edge when it comes to term negotiations.

Where Does Three-Way Matching Fit Into Accounts Payable Review and Approval?

Though every step of the accounts payable workflow is important, the review and approval stage is where money is often saved or lost. It’s the step when businesses make sure that improper payments aren’t made, and one way to do this is by employing three-way matching.

Three-way matching in accounts payable is a process that’s typically used for purchasing goods. It helps compare what the company ordered (PO) with what the company received (receiving report) and what was billed by the vendor (invoice). Close examination via three-way matching before any invoice gets approved is a gold-standard approach to avoiding financial errors and risks.

What Are Accounts Payable in Accounting Terms and Journal Entries?

The accounts payable process requires specific recording procedures. Under accrual accounting rules, obligations, such as purchases on credit, are recorded using double-entry bookkeeping. In double-entry bookkeeping, every transaction must have an equal debit and credit recorded. So, an invoice will be marked as an expense or asset (a debit), which will trigger an increase in accounts payable (a credit). When the invoice is paid, accounts payable will reflect a debit while cash will reflect a credit.

Let’s look at a simple example. Say a construction business purchases a piece of equipment for $20,000, with payment due in 45 days. Here’s how it would be recorded:

Equipment: $20,000 (Debit)

Accounts Payable: $20,000 (Credit)

When the invoice is paid, the payment recording will look as follows:

Accounts Payable: $20,000 (Debit)

Cash: $20,000 (Credit)

This double-entry process balances the business’s books. Should there be an imbalance, the business will be alerted that a mistake has been made, so they can fix it.

Additionally, businesses can negotiate early payment discounts, which can alter how an invoice payment is recorded. For example, the account payable would be debited for the full invoice balance, the cash account credited for the amount actually paid, and the early payment discounts account credited for the discount taken.

What Counts as Accounts Payable, and What Doesn’t Belong There?

Accounts payable can sometimes be confused with other accounting terms, such as accounts receivable (AR). While accounts payable are monies businesses owe others, accounts receivable are monies owed to the business. Accounts payable should also be distinguished from expenses and notes payable. Expenses are costs recognized on the income statement, while notes payable are borrowing obligations documented by a written promise to repay and may be short term or long term.

As noted earlier, accounts payable include any payment a business owes suppliers for things such as utilities, leasing, and outside services. Trade payables, another term that can be conflated with accounts payable, are a subset of accounts payable. They include the amounts a company owes its vendors for raw materials, inventory, or other goods/services bought on credit and used in the completion of core business operations. Steel purchased on credit by a car manufacturer or bulk produce purchased on credit by a restaurant are examples of trade payables.

Importantly, taxes, dividends payable, and other non-trade payables are short-term liabilities that are not considered accounts payable.

When Should a Business Use an Accrual Instead of Accounts Payable?

Unlike accounts payable, an accrual, or an accrued expense, is an expense that was incurred in one accounting period but paid in a future accounting period.

Common reasons for using accruals vs. accounts payable include:

• Lack of an invoice.
• Estimates.
• Unpaid employee wages.
• Accrued interest.
• Monthly utility usage (before the bill arrives).

How Accounts Payable Impacts Cash Flow and Financial Planning

Understanding what accounts payable and accounts payable management are leads to one critical question: “How do they impact a business’s cash flow and financial planning?”

The answer is easy. Accounts payable management informs businesses of how well they’re managing their short-term liquidity. Paying on credit allows them to have more cash on hand as long as they optimize their payment timing. For example, paying on time equals happy, trusting vendors (and the potential ability to negotiate favorable terms), but paying too early (unless there’s an early-payment discount available) can leave businesses strapped for cash.

Effectively managing accounts payable equips businesses with data-based metrics, such as Days Payable Outstanding (DPO) and AP Turnover Ratio, that they can use to make sound financial decisions. Days Payable Outstanding (DPO) estimates the average number of days a business takes to pay its suppliers. A higher DPO may reflect favorable payment terms or slower payments, while a lower DPO indicates faster payments, potentially to capture early-payment discounts. DPO should be evaluated against agreed payment terms and industry norms. Accounts Payable Turnover Ratio calculates the average speed at which credit purchases are paid.

Formulas:

DPO = (Average Accounts Payable ÷ Cost of Goods Sold) × Average Number of Days in Accounting Period

Accounts Payable Turnover Ratio = (Total net credit purchases from all suppliers during the period) / (Average accounts payable balance for the period)

Financial planning begins and ends with understanding the financial health of a business. Cash flow, which is directly connected to accounts payable, is an integral component of a business’s financial health.

What Are Accounts Payable in an ERP System, and How Does the System Improve AP Workflows?

According to DocuClipper, 68% of invoice data is manually entered into accounting systems on average. Approximately 37% of businesses are still relying on paper invoice receipts, and the average cost of processing an invoice manually is $15.

High costs, risk of error, and inefficiencies are the result of relying on manual AP processes and workflows. The solution? Accounts payable workflows in a comprehensive ERP system’s accounts payable software.

ERP-based accounts payable solutions help growing businesses manage their increasingly higher invoice volumes and complex accounting requirements. Invoice data, vendor records, approvals, due dates, discounts, and payment status are centralized in the ERP system, which also ensures that POs, receipts, AP documents, and General Ledger entries align in one place.

With the right automated accounts payable solution, businesses can:

• Reduce manual invoice processing by capturing invoices from PDF files and email attachments.
• Use AI-assisted bill entry to create AP documents with less manual data entry.
• Route bills through configurable approval workflows.
• Process vendor payments individually or in batches.
• Track due dates, discounts, cash requirements, and aging.
• Support multiple currencies, entities, tax requirements, and payment formats.
• Maintain source documents, role-based security, and audit history.
• Improve accuracy and identify exceptions with AI-powered pre-approval and payment.
• Accelerate and prioritize approvals and payment based on due dates, available discounts, outstanding balances, and cash requirements.

Managing accounts payable through a modern, comprehensive ERP system helps businesses streamline AP workflows, improve reporting, manage complex requirements and purchasing processes, and gain better visibility into liabilities and cash flow.

What Questions Should Buyers Ask About AP in Modern ERP Systems?

When searching for a modern ERP solution with advanced AP software, businesses should consider the financial features and benefits each option provides. That consideration includes asking certain questions, such as does the ERP solution:

• Capture invoices automatically?
• Manage documented approval workflows?
• Provide role-based access?
• Deliver audit trails?
• Handle discount tracking?
• Manage vendors, tax requirements, and reporting?

Answering “yes” to these questions may suggest that the system being evaluated is a solid choice.

How Accounts Payable Supports Smarter Business Operations

Accounts payable is simultaneously an accounting function and a business operations lever. Considered a current liability and part of accrual accounting, accounts payable help businesses monitor and manage their cash flow. When connected with purchasing, vendor records, tax handling, and the GL in a single ERP solution, AP workflows are enhanced with greater visibility, fewer manual handoffs, cleaner audit trails, and better reporting.

For more information on AP workflows in an ERP system, watch Acumatica’s Accounts Payable Overview video, and reach out to our experts with any questions.