Tracking What you Owe – Accounts Payable
Whenever I meet with a potential client for the first time, I always start off by asking two simple questions: “What are some pain points in your business?” and “What do you want from your accounting system?”
When I asked these questions in my most recent meeting, the client answered by saying he has no idea how much he owes his vendors, or when those payments were due. Currently, they just record a check, posting it directly to the expense or liability account.
This reminded me that not all business owners and bookkeepers understand the many benefits of entering bills as accounts payable. Even if your reporting method is cash basis, you can still use accounts payable as a way to track what is owed and when it’s due.
Benefits of Using Accounts Payable
There are several great benefits to using accounts payable. As mentioned previously, when you enter bills into your accounting or business class bill pay system (we recommend Bill.com), you will have the ability to view reports such as the ones listed below. In addition to showing you how much you owe your vendors, and when the payments are due, this makes it much easier to forecast your cash needs so you can plan accordingly.
Recommended Accounts Payable Reports
- Unpaid Bills – This is a list of bills that you haven’t paid, or bills that have been partially paid. Generally, this report also includes the payment due date.
- Accounts Payable Aging – This is a display of unpaid bills and the time frame that they are due or overdue. Many systems offer the option to view either a detail or summary report.
Another valuable benefit of using accounts payable, rather than posting payments as checks, is that your financial reports will display more accurate information.Your expenses will show as of the date they were incurred, instead of the day they were paid. Here is an example of how this process affects your financials:
Scenario 1 – Posting bill payments as checks
Let’s say your January Phone bill is $250.00. You had a slow month in January and cash flow was tight, so you waited until February to make the payment.
When the February phone bill for $250.00 arrived, you paid it right away since your cash flow was looking better and you didn’t want to forget about it.
The profit and loss report would show a $500.00 phone expense in February – even though that was two months of bills – and $0.00 in January.
If this is similar to other expenses in your financial report, it’s going to look like the more profitable month (February) is the least profitable, because you paid the previous month’s bill when you had the money.
Scenario 2 – Entering bills as accounts payable
The January phone bill for $250.00 is dated for January 15th and entered into Accounts Payable.
The February phone bill for $250.00 is dated for February 15th and entered into Accounts Payable.
This would show a $250.00 phone expense in January, and another $250.00 expense in February, regardless of when you made the payments. This offers a clearer picture of your business performance, allowing you to plan and forecast more accurately.
How to Properly use Accounts Payable
To ensure that you get the desired results as explained above, you will want to make sure that you are entering the information properly. Below are some key points to keep in mind when entering bills into your system.
Vendor: Make sure your vendor information in your system is complete and accurate. This includes the remittance address, email address, and account number. If printing checks from your accounting system, make sure the account number is included in the check memo line. This ensures the payment gets properly posted to your account. If using an electronic payment processor, the same rule would apply.
Tip: if you have multiple accounts with the same vendor, we recommend a separate vendor account for each account – include the last 4 digits of the account number at the end of the vendor name for easy identification.
Date, terms and due date: When entering bills, the date entered should be the date that appears on the bill. For credit card statements, you would use the statement ending date. Enter the due date as it appears on the bill or calculate it based on the terms.
Tip: If the bill does not list terms or a due date, we use Net 30 as our default terms.
Amount: We strongly suggest that you ALWAYS enter the amount as shown on the bill. This makes it easier when you are trying to research information. If an item was returned, received, defective, or you were overcharged, you should contact your vendor and ask them to issue a credit memo. Once the Credit Memo is received,you can apply it to the balance due on the bill.
I hope this information gives helps you to understand the benefits of using the accounts payable process. If you are looking for help to streamline your system, or add an accounts payable system, contact Think Beyond the Desktop for a no charge consultation.