What does Accounts Payable do? - YouTube

Hi, I'm Ralph with Nvoicepay, and I'm going to explain what accounts payable does.

But before I begin, we need to know how accounts payable or AP walks and talks.

The first step AP takes is deciding how to record its transactions.

They'll decide between a cash- or accrual- based method.

Cash-based accounting is what we experience on an everyday basis.

The money in my wallet is the only money I have. So when I purchase say, a coffee,

I feel that purchase because I've given you, the barista, my dollars in exchange for a latte.

In accrual-based accounting, however,

the money is transferred once goods or services are completed.

The difference here is that although we may not exchange actual folding bills,

that money has indeed transferred hands.

So, for example, I sell you a twenty pound bag of roasted coffee.

I'll leave an invoice saying you have 30 days to pay me back.

As far as I'm concerned, I already have your money, even though you haven't physically paid me.

In order for this to work, we need to believe in the accounting equation,

which reads: assets is equal to the sum of an organization's liabilities and equity.

Said another way, a company is the accounting equation but let's make it a little simpler to follow.

We're going to ignore the equity part and focus on the assets and liabilities part.

With that we can introduce accounts payable, but before we take another step,

just because accounts receivable is on the other side of the equals does not

make it equal to accounts payable.

They are just different buckets in an organization holding time and money.

Now that we've taken our first few steps with accounts payable,

We're ready to say our first words: double-entry bookkeeping.

That's what AP speaks. That's how they record their history, and they've been

doing so that way for a long time.

It's kind of like the laws of physics, but for accountants.

For every transaction, there's an equal and opposite transaction.

Here is a proper definition of double-entry bookkeeping.

I'll spare you from reading it and highlight the important parts

But we need to redefine what a debit and credit is.

Double-entry bookkeeping defines a debit as occurring on the left side

and a credit as occurring on the right side.

To put some context behind that, we can think of a debit as incoming and a credit as outgoing.

But we're going to be real fast and loose on that part, so just try to think of debit as occurring on the left,

and credit as occurring on the right. That will make sense in this next slide.

This is what the accounting equation looks like in double-entry bookkeeping speak.

I liken it to how something enters an organization,

And for that to happen, the equation always needs to be true.

So if we use that same 20-pounds-of-coffee-beans example from earlier,

from the perspective of the merchant's accounts payable, this is how that transaction played out:

They added 20 pounds of coffee to their inventory, an asset occurring on the green plus,

or a debit on the left-hand side of the tee.

And a liability occurring on the red minus or a credit on the right-hand side of the tee.

And that's why it's easier to accept the definition of debit and credit as left or right, respectively.

Let's try a different example. Here at ralph corp, we make salsa.

A single batch of our awesome-sauce requires about a thousand pounds of tomatoes.

I buy some from a vendor at $1 per pound.

Our books would balance immediately because I paid for those tomatoes on the spot.

I'd cut a check and get to making my salsa.

But I have a great relationship with my tomato vendor and we both walk and talk in accrual-based accounting.

The first step of that transaction looks very similar to the cash-based method.

Only instead of using my checking account, I use

-you can't see what I'm doing, but I'm doing finger quotes-

I use accounts payable to pay.

So I accept the liability in AP in the form of a credit,

and my tomatoes as an asset. 30 days later, I'm ready to pay my vendor.

I pull out my checkbook and write a check.

In doing so, I clear AP of that credit, showing it as a debit, and balance my books.

Awesome right?

So now that you can walk the walk and talk the talk of AP, are you ready to walk a mile in their shoes?

Here's when a job description from monster.com reads for a clerical position in accounts payable.

In one bullet point, a person working AP is expected to: pay vendors by monitoring

discount opportunities; verify federal ID numbers; schedule and prepare checks;

resolve purchase orders, contracts, invoices, or payment discrepancies, and

documentation; ensure that credit is received for outstanding memos; and issue

stop payments or purchase order amendments.

That's a giant mouthful for just one bulleted item.

And that's why we're only going to focus on that one bullet point:

pays vendors by monitoring discount opportunities.

Think of AP like a credit card. Again, credit is a liability.

Vendors and suppliers allow an organization to charge for a good or service.

And they'll repay with an agreed-upon time.

However vendors and suppliers may be willing to reduce the bill by a few percentage points if they paid a little sooner.

these discounts are advantageous to both parties because it helps accelerate cash flow

and that always keeps everyone happy.

Verifying federal ID numbers:

The master vendor file or MVF contains sensitive information such as banking routing numbers,

federal & tax IDs necessary to pay a vendor. This MVF is just the list

of vendors and suppliers an organization has done business with before,

and can be a point more fraud is introduced.

A malicious employee can add him or herself to the MVF and issue a payment to themselves.

This is especially problematic with smaller companies of, say, ten or so employees

where an accountant or two are responsible for an entire organization's financing.

Keeping the contents of the MVF up to date assures that vendors are paid in a

timely manner, plus assuring its safety and integrity helps prevent fraud.

Scheduling and preparing checks: AP spends the majority of their time doing that.

Preparing a check for payment can be a very time-consuming task.

It may involve getting multiple levels of authorization and/or check signatories,

which requires AP to transport checks.

That logistical nightmare slows things down to a crawl.

It can introduce fraud and can even cost departments valuable discounts

they could otherwise earn by paying sooner.

Resolve purchase order, contract, invoice or payment discrepancies, and documentation:

AP first needs to tackle the front end process,

which is the purchase order, the invoice, and the packing slip,

which often requires coordinating with many different departments.

Fraud prevention here works by matching these three,

where the PO, invoice, and packing slip must all match up before a vendor is paid.

And this is a very time-consuming job, requiring a lot of organization in AP's workflow.

Reconciliation also falls under this point. That's the last step of the payment workflow.

It's the same as you logging into your bank account to make sure that a payment has cleared.

A way that ap helps prevent fraud is by using a positive pay or vendor positive pay

system commonly available through banks. These services work by informing banks

ahead of time to expect checks paid to specific vendors in specific amounts.

Those are the only ones allowed to be cleared. This service is becoming increasingly necessary

as a cost of getting things done, meaning it may fall under reasonable care.

Failure to purchase those services from a bank could leave organizations on the hook for fraud.

Ensuring credit is received for outstanding memos:

This step is to assure that other vendors have applied discounts correctly.

The best example of this is when applying early payment discounts.

AP would call to make sure that the discount was honored and applied correctly,

along with assuring that the account is in good standing.

This is important for cash flow, discounting, and vendor relations.

Issuing stop payments or purchase order amendments: This is exactly what it sounds like.

Although it doesn't happen every day, it serves to show the attention to detail

AP takes when taking care of business. For example,

a stop payment may be issued after X number of days of non-reconciliation,

meaning AP has tracked all bank accounts at regular intervals to verify payment posting.

Ones that haven't reconciled will require an investigation and a possible stop payment,

along with the rebalance to the ledger. This is a prime opportunity for fraud, when relations can take a huge hit.

A check was voided, but the books show it as paid.

That one bullet point required many miles to be walked and many different hats to be worn.

I hope this presentation has helped you better understand AP's responsibility,

and given you a deeper appreciation for them.

Again, I'm Ralph with Nvoicepay, and thank you for watching.