There are many moving parts to keep track of when taking care of your business’s accounting, and the accounts payable process is one of the most important.

Accounts payable describes the various amounts of money your business owes to external vendors for goods and services that you have not yet paid for.

In this post, we’ll dive deeper into the accounts payable process steps, including how it works, why it is important, and how you can save time by streamlining your workflow.

What is the accounts payable process?

Accounts payable, also known as AP, are the total debts that you owe to other businesses for products and services that they invoiced you for. Your company’s accounts payable debts are found within the current liabilities section of your balance sheet. These amounts are treated as short-term debts, rather than long-term debts, like a business loan.

Step 1. Create your chart of accounts

The first step of the accounts payable process is to create a chart of accounts, which is an organizational chart that summarizes where you record accounting transactions.

Generally, a chart of accounts will have five primary account types:

Income accounts
Asset accounts
Liability accounts
Expense accounts
Equity accounts

Each account category will have different account names with an associated account number and financial statements. You can also create subcategories to further divide and make them more organized.

Step 2. Assign vendor details

Next, you should assign vendor details to help you keep track of orders and payment deadlines, then assign codes to remind you about future payments.

Here are some vendor codes you can use:

Net 10: Payment is due in 10 days.
Net 30: Payment is due in 30 days.
Net 60: Payment is due in 60 days.

Assigning codes organizes accounts payable processing so you know when to expect payments. Using accounting software for this step allows you to automatically track payment terms and assign payment due dates.

Step 3. Invoice approval

Before initiating payment, you’ll want to review your invoice for accuracy and ensure you’ve received the product or service requested. You can use the three-way match to verify the invoice before paying them.

Here’s how the three-way match accounts payable process works:

Purchase order: Use this official order confirmation to verify the quantity, cost, and payment terms.
Order receipt or goods received note: Ensure the vendor delivers the purchase correctly.
Invoice: Confirm the amount you owe and the payment terms.

Once you ensure the invoice is correct and approve it, you can record the invoice information in your accounting software, including the invoice number, the amount due, and the due dates.

Step 4. Process payment for outstanding invoices

After verifying the accuracy of your invoices, you can initiate invoice payments to the appropriate vendors. Depending on the vendor’s preference and your payment method, you may need to notify them that payment is on its way.

Review your accounts payable weekly to ensure there are no outstanding payments and to confirm you completed the payment.

Step 5. Record and repeat

Once you’ve completed these steps, it’s time to update your books to reflect the most current information. After a vendor payment has gone through, you can remove it from your list of accounts payable. Then repeat this process weekly.

You can automate reconciliation with accounting software to ensure you’re paying vendors on time to avoid late fees.

Why is the accounts payable process important?

The accounts payable process plays an important role in your business’s accounting operations for several reasons.

Here’s how implementing an accounts payable process can benefit your business:

Better manage finances: Knowing what you owe helps you better understand how to manage your business’s finances. You can avoid errors and strategize your spending and saving while easily settling your debts.
Boosts relationship with vendors: Recording and making timely payments is a great way to facilitate positive vendor relationships.
Helps save money: Some vendors implement late fees for late payments, while others offer early payment discounts for settling up ahead of time. Keeping track of your amounts due can help you save money.
Keep historical records: Recording invoice data provides organizational peace of mind and creates a clear picture of the transaction history. A detailed database of your outgoing payments can help you identify and resolve spending issues more efficiently.

Keeping your accounts payable organized and in check helps you maintain accurate records in case of a tax or business audit.

Accounts payable process challenges

Whether you just started processing accounts payable or you’ve been trying to streamline it, there are a couple of challenges you may face, especially if you’re doing it manually.

Some of the accounts payable challenges include:

Keeping track of data manually: Tracking your accounts payable manually can not only be time-consuming but can lead to errors and missing invoices.
Long approval process: Reviewing your invoices for accuracy can lead to a long approval process, especially if they are not readily available.
Invoice errors: Sometimes, your invoices might not be correct, which may take time to communicate with the vendor and fix it.
Missing documents: Recipients might also misplace paperwork, resulting in late payments and fees.
Duplicate payments: Tracking invoices improperly can also lead to duplicate payments.

Most businesses have these challenges when tracking accounts payable manually. With accounting software, you can track expenses to ensure your accounts payable process is more accurate.

Tips for streamlining the accounts payable process

By this point, you probably know that implementing an accurate accounts payable process is key to keeping your finances in check and making sure payments don’t go missing. But it’s no lie that it can be a time-consuming process that needs streamlining.

If you want to streamline your accounts payable process, here are some things you can try:

Creating monthly reports: Run reports monthly or weekly to identify trends, improve your AP process, and avoid late payments
Setting up reminders: Create reminders for invoice payment deadlines or weekly status checks on your accounts payable.
Moving to electronic payments: Try making only electronic payments when possible to make the process faster and less manual.
Making early payments: Consider making early payments whenever possible and explore possible discounts with vendors.
Using accounting software: Keeping everything in one place with accounting software can automate the process by integrating invoices and payments. QuickBooks can help you schedule and pay bills online so you’re always on time. You’ll get notified when bills are due, and can quickly pay vendors and contractors with a bank deposit, check, or ACH bank transfer.

The accounts payable process doesn’t have to be a dreaded task when you habitually review your invoices weekly and implement accounting automation opportunities.

Choose the best payment setup for your business

Many things contribute to your small business’s success, but effectively managing cash flow is critical. Adding in the accounts payable process is necessary for effective business accounting, but we know it can be time-consuming.

With QuickBooks, you can automate expense management and get back to doing what you love about running your business. Whether that’s getting your hands dirty at a job site or dazzling clients and securing contracts, more time means more control over your journey.

This article originally appeared on the Quickbooks Resource Center and was syndicated by MediaFeed.org.