Accounts Payable (AP) means present and due liabilities of a firm or company for goods and/or services supplied by vendors and suppliers but not paid for. AP is recorded as a current liability in the balance sheet of a company. Activities under AP include the processing of invoices, approval of payments, and disbursements, and keeping accurate financial records and adherence to payment terms such as Net 30, early payment discounts, etc.
Key Terms
| Term | Definition |
|---|---|
| Accounts Payable | A current asset account that carries the amounts owed to vendors for goods/services received but not yet paid for and which stand on the balance sheet until payment falls due. |
| Invoice Processing | The receipt, validation, approval, and posting of vendor invoices for payment—an essentially automated process these days owing to AP software solutions. |
| Payment Terms | Contractual terms concerning date of payment that indicate a due date (e.g., Net 30) and may include any early payment discounts that may be applicable (e.g., 2/10 Net 30). |
| Three-way Matching | A control process that verifies matching of purchase order, receiving report, and vendor invoice before payments may be approved in order to catch erroneous or fraudulent transactions. |
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Three-Way Matching
Three-Way Matching is a control process that verifies matching of purchase order, receiving report, and vendor invoice before payments may be approved in order to catch erroneous or fraudulent transactions.
| Document | Purpose |
|---|---|
| Purchase Order | Verifies authorization of order |
| Receiving Report | Verifies delivery of goods/services |
| Vendor Invoice | Verifies pricing and terms |
Payment Terms
The terms negotiated between buyer and seller include:
- Net 30: Payment is to be made within 30 days of shipment or receipt of invoice.
- 2/10 Net 30: 2% discount if payment is made within 10 days.
AP Automation
Software that handles invoices with the minimal amount of human data-entry and therefore, human error. It has features that include:
- OCR (Optical Character Recognition) scanning
- Self-approving business processes
- Integrated with Accounting systems
E-Invoicing
Electronic invoices exchanged between suppliers and buyers rather than paper-heavy processes.
Components of AP Processes
By integrating the use of technology and standardized business processes with the non-stop flow of cash, modern accounts payable functions have enabled their stringent control over funds. These operational processes guarantee prompt and accurate payment with the capture of early payment discounts while preventing duplicate or fraud payment.
| Component | Function |
|---|---|
| Invoice Capture | Technology capturing data from paper/PDF invoices (through OCR or AI) and inputting it into AP systems without keying. |
| Approval Workflows | Customizable rules that route invoices to the right approvers by amount, department, or vendor, with audit trails. |
| Payment Execution | Disbursal options (ACH, checks, virtual cards), all with embedded fraud detection and bank reconciliation. |
Key Metrics
These are the metrics a firm may use to gauge AP performance:
- Per Invoice Cost: The average cost of per invoice to process (Target: <$5 thru automation)
- Cycle Time: The number of days to get invoice through payment (Target: <5 days)
- Excellence Factor: World-class standards in every metric and measure of performance for various processes; in effect, it means measuring the inputs to, through-put in, and outcomes out of an activity considered.
Conclusion
Modern accounts payable operations have transformed from back-office clerical functions to strategic financial hubs through automation and integration. By implementing AP automation software with robust three-way matching and approval workflows, organizations can reduce processing costs by 60-80% while improving compliance and capturing early payment discounts. The integration of e-invoicing networks and payment gateways further enhances efficiency, creating a seamless flow from procurement to payment.