Managing Accounts Payable & Accrued Expenses

The fact that accounts payable represent outgoings generally regarded as disadvantageous. This does not imply that it need not receive an organization’s attention as much as accounts receivable. A properly managed system of accounts payable would ensure among others, avoidance of duplicate and erroneous payments, continuance of supplies without interruption and procurement of supplies at the best prices and terms. On the flip side, an efficient system of tracking payment due dates, planning for funds and discharging your commitments to the creditors in a timely manner would earn credibility for the organization.

Features of a well-managed system of accounts payable would include:

  • A built-in system of good internal checks and controls in place to ensure that a single person does not handle more than one task down the line in disposing of an account payable from its start to end. Relevant documentation for payments should be prepared, checked, certified and authorized by different authorized officers at different levels. The key stages of discharging a payable account comprise of raising a purchase requisition followed by a purchase order (by two different departments), raising a goods received note at point of receipt of goods, QC report certifying that the goods are up to the required standards, receipt of supplier’s AD and Invoice, entering the purchase day book, posting to creditors’ ledger individually and to the general ledger control account in total to create the liability or accrual (by two different persons), compilation of a payment voucher a few days in advance of due date, checking, certifying, authorizing, drawing check, posting cash book entries and creditors’ ledger and general ledger postings once again to record the payment.
  • A computer-generated system incorporating all above features is preferable although not essential.
  • The Officer preparing payment voucher should match supplier’s AD and Invoice with purchase order, and the GRN with QC report. These documents would establish that the payment is prepared in accordance with quantities received in good order at approved prices and on agreed credit terms. If a relevant short list of authorized prices could also be annexed, it would help satisfying those concerned that the purchase order too contains no errors.
  • If all the above documentation is in order, three different authorized officers at different levels at different stages will check, certify and authorize the payment voucher and pass it on for payment. Again this workflow process may be different for different firms.
  • So much for an efficient payment procedure. Additionally, the organization should have clear cut policies too, especially with regard to the following:
    • Call for quotations from several suppliers, negotiate, and award to the best supplier not only with regard to price but also taking into consideration quality, quantity and cash discounts, reputation, reliability, lag time etc.
    • Never pay earlier than due date except for a very special reason.
    • If you have to go slow on payments, do so only with the awareness and concurrence of the supplier.
    • The system you have should make funds available in time for payments. You may reserve a particular day or two per week for payments instead of every day.
    • Ensure that you purchase what are essential according to minimum stock levels to be maintained, and do not overstock unless for a special authorized reason. Have your cash flow in mind in formulating ordering and purchasing policies. Try to curtail purchases wherever possible.
  • If you get any supplier to agree to a bartering arrangement rather than for payment, it would be like being armed with a double-edged sword.
  • Remember that there is a higher processing cost attached to credit purchases. Hence, fix a minimum level in cash value for credit purchases. Channel all lower value purchases on a cash basis. This would help slacken the pressure on an already heavily burdened credit purchase system.
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