How to set up an accounts payable system
Accounts Payable takes into account every purchase your company makes, including materials, equipment, office supplies, utilities, phones, loans and transportation costs. An effective Accounts Payable system will help you keep track of these expenses, verify that you’re paying the correct amount and simplify bill paying.
While smaller businesses can get by using a simple manual system, many business owners find accounting software is the best way to handle Accounts Payable. One accounting software to consider is SimplyAccounting.com, which is available in Spanish.
They offer several products starting as low as $69.99. Compare the features of any software package with the needs of your company before purchasing. If you purchase accounting software, you’ll need someone to be responsible for data entry. For Accounts Payable, each vendor name and address, and their payment terms should be entered.
Payment terms are conditions under which a seller will make a sale. Typically these terms specify the period allowed to a buyer to pay off the amount due. Cash is the most common term. If you make a purchase with a business credit card, your payment terms are determined by the credit card company.
Vendors you purchase from regularly may provide a credit account and send invoices for all purchases made during the month with payment due according to the terms.
Always ask if there is a discount for prompt payment of Accounts Payable. Some vendors will lower the amount due if you pay within a certain number of days. An example of a prompt payment discount is 2% 10 Net 30, which means the invoice is due in 30 days, but if it is paid within 10 days, a discount of 2% can be taken.
If the term shown on the invoice is 1% 15 Net 30, a 1% discount can be taken if paid within 15 days with full payment due in 30 days. A payment term of Net 30 means the invoice must be paid in 30 days and no discount is offered.
Just as cash discounts are sometimes offered for prompt payment of bills, late fees and penalties may be charged if you pay invoices after the vendor’s terms. These late payment fees can add up quickly and may damage your credit rating. Always pay your bills by the due date to avoid late fees and maintain a good relationship with your suppliers.
Setting up an accounts payable system
Whether you track Accounts Payable by hand or by computer, a good system involves these basic steps:
- Issue a Purchase Order and make your purchase. Purchase orders are the first step in an Accounts Payable system. When you decide to buy equipment or supplies, create a purchase order authorizing the purchase and include the prices. Although all vendors do not require purchase orders, they are an excellent way to lock in special or negotiated pricing, as well as itemize what you are buying.
- Record the expense and subsequent payments in a Cash Disbursement Journal. The next component of an Accounts Payable system is the cash disbursement journal. In it, you record all purchases, all checks written and other payments.
- Keep a separate Accounts Payable ledger for each supplier and record all purchases so you can easily determine how much you owe a particular supplier.
Regardless of how you handle Accounts Payable, hold onto purchase orders, invoices and receipts in case of disputes or tax audits. Maintaining a good grasp on your Accounts Payable will give you a better picture of your company’s financial health and help you manage your cash flow more efficiently.
—By Kay Petermeyer