When your company orders and receives products in advance of making the payment, it is buying the products on account or credit. Your supplier is known as the creditor. If your company (the business receiving the products) doesn’t sign a promissory note, then, you should record the invoice in your business liability accounts payables.
Like all liability accounts, the accounts payable has a credit balance in both the trial balance and balance sheet. Hence, when you record the vendor’s invoice, you should credit the accounts payable and debit another account as required by the double entry accounting system. When you pay for the products purchased on credit, you should debit the accounts payable and credit the cash account with the same amount. Therefore, the credit balance amount must be equal to the amount shown in the vendors’ unpaid invoices.
If you are using the accrual basis of accounting, you must report the liability associated with the credit purchase no later than the date your business received the products. This shows that you must report the expenses when they are incurred rather than when they are paid.
To manage the accounts payable effectively, you should review all the details associated with these accounts to ensure only accurate and legitimate amounts are fed into your business accounting system. In most cases, you will need to review the following documents.
- Purchase orders issued by your company
- Receiving reports that your company has issued
- Invoices sent from your business vendors
- Contracts and other related agreements
The accuracy of the accounts payable has a direct impact on completeness and the accuracy of your company’s financial statements. Besides, the effectiveness of your accounts payable practices will also impact your business’s credit rating, financial position, and relationship with your suppliers. Therefore, you must ensure that your accounts payable process include the following.
- Timely processing of legitimate and accurate invoices from your company vendors
- Appropriate and accurate data entry in the general ledger accounts
- Accrual obligations and expenses that haven’t been entirely processed
Lastly, you must have a variety of checks against abuse by accounts payable personnel. Segregation of duties is among the common controls. You must ensure that every employee responsible for various tasks associated with the accounts payable knows what should be done. They should also be able to recognize fraudulent invoices and vouchers to avoid huge losses that might be caused by unnecessary payments. Alternatively, you can consider leveraging on the accounting service in Singapore so to let an independent professional manage for you.