When a business gets things or services on credit, it needs to pay its suppliers. This money is called accounts payable (AP). Instead of paying right away, the business gets a bill (an invoice) that it needs to pay later, usually within a short period. This amount shows up on the balance sheet as a current liability, meaning it’s a short-term debt the business must pay soon. Paying your suppliers on time is super important to avoid any late penalties or harm to your business relationships. If your accounts payable amount grows, it usually means your company is buying more on credit. But if it goes down, it could mean you’re paying your bills faster than you’re buying. Now, you might be wondering: What are the 4 functions of accounts payable?
We’ll explain each of them clearly in this blog to help you understand how this part of your business plays a key role in managing cash flow and keeping things running smoothly.
At SAS KPO Services, we help businesses like you manage accounts payable accurately and efficiently, so you never miss a due date and always stay on top of your finances. Stay with us to explore the important functions and benefits of a well-handled AP process!
Types of Accounts Payable
Accounts payable (AP) represent the money a business needs to pay to others and plans to pay within a year. However, not all debts or liabilities are classified as accounts payable. To be considered AP, the amount must have an invoice, be short-term, be processed through the AP system, and be recorded under current liabilities on the balance sheet. The four main types of accounts payable are trade payables, expense payables, notes payable, and taxes payable.
Trade Payables
Trade payables refer to amounts owed to suppliers for goods related to the company’s inventory or production. For example, a bakery’s trade payables include invoices for ingredients like flour and sugar. These payables are important for managing inventory costs and are recorded in a specific account within AP.
Expense Payables
Expense payables cover money owed for non-inventory goods and services such as advertising, insurance, utilities, office supplies, or cleaning services. Using the bakery example again, the payment for cleaning services received but not yet paid would fall under expense payables. This category makes up the majority of accounts payable.
Notes Payable
Notes payables are formal, written promises to pay a certain amount and often arise when businesses restructure their trade payables into loans. Accounts payable only include the part of notes payable that are due within a year. These are more official debts compared to regular payables.
Taxes Payable
Taxes payable include amounts owed to government authorities for various taxes like sales tax or income tax. Even though these are not invoiced by the government, they are recorded as payable when they become due within the year. Also, these are thought of as current problems.
Other Payables
Other types of payables such as dividends payable (money owed to shareholders) and rebates or discounts payable (amounts owed back to customers) exist but are often handled separately or outside the typical AP system.
Understanding the 4 functions of accounts payable helps in grasping its importance. The AP department is in charge of checking and handling invoices, making sure payments are made on time, keeping correct records, and managing relationships with suppliers. These functions keep a company’s cash flow healthy, and operations run smoothly.
In conclusion, accounts payable include various types of short-term liabilities, but only those meeting specific criteria are classified as AP. Recognising these types and the function of AP is essential for clear financial management and business success.
What Are the 4 Main Jobs of the Accounts Payable Team?
The key component of every firm is the accounts payable (AP) staff. They make sure everything is accurately recorded and that invoices are paid on schedule. Here are the four main things they handle explained in simple words:
Checking and Handling Invoices
The first task is to collect invoices from vendors or suppliers. The AP team checks these to make sure all details are correct like the amount, the items or services received, and the payment terms. They also confirm the bill matches the purchase order before moving forward.
Making Payments
Once the invoice is approved, the AP team makes sure it gets paid on time. This could be through a bank transfer, cheque, or any other method the business uses. They stick to the timeline agreed with the supplier for like 30 or 60 days.
Keeping Records in Order
The AP team keeps track of every transaction. They update the books, so the business knows how much money is going out and when. These records help avoid mistakes and keep the business financially healthy.
Dealing with Vendors and Suppliers
The AP team also builds good relationships with suppliers by paying on time. This helps the business maintain trust, get better deals in the future, and keep the supply chain running smoothly.
In short, the accounts payable department doesn’t just pay bills, it helps the business stay organised, avoid late fees, and keep good relationships with suppliers. It’s a key part of smooth and smart business operations!
Everyday Examples of Accounts Payable in Action: Simple Insights
Accounts payable isn’t about paying bills, it’s about keeping your business running smoothly by handling all the money owed by others. If you’re wondering about the 4 functions of accounts payable, they include invoice handling, payment processing, maintaining records, and managing relationships with vendors. To understand this better, here are some easy-to-related examples that show how accounts payable work in real life:
Shipping and Delivery Charges
If a business sells or buys products, it often needs to pay for delivery services. Whether it’s sending products to customers or receiving supplies from vendors, these transportation charges are part of accounts payable. Paying them on time helps avoid delivery problems.
Buying Raw Materials or Office Supplies
Let’s say a factory makes furniture. It needs wood, screws, and fabric. The costs of these materials are tracked in accounts payable. Paying suppliers on time means the factory can keep making furniture without any delays.
Hiring Outside Help
Companies often hires outside experts like IT support, digital marketers, or legal advisors. These service payments also go through accounts payable. Paying them regularly builds trust and ensures continued service.
Paying for Software Tools
Most businesses use software like Zoom, QuickBooks, or Microsoft 365. These tools require subscriptions or licenses. All these payments fall under accounts payable and missing them might result in losing access to important tools.
These real-world examples show just how important accounts payable are in daily business operations. It’s not just about money going out it’s about keeping things running efficiently and maintaining good relationships with everyone a company works with.
Does Your Startup Really Need an Accounts Payable (AP) Department? Let’s Break It Down
Wondering whether your startup needs a full AP department yet? It’s not always a clear yes or no but don’t worry. Let’s simplify it. Instead of just guessing, here are a few key things to think about. And while we go through them, keep in mind this helpful question: What are the 4 functions of accounts payable? invoice handling, payment processing, record-keeping, and managing vendor relationships. These functions can guide you in deciding what your startup needs right now.
How Many Bills Do You Handle Each Month?
If you’re dealing with lots of payments say to different suppliers, freelancers, or contractors then it might be time to think about having someone (or a small team) take care of this. A dedicated AP setup ensures payments are done on time and helps avoid costly mistakes.
Which Industry Are You In?
Some industries, like healthcare, finance, or manufacturing, have specific rules and complex payment processes. If your startup falls into one of these categories, having someone focused on AP could really help with staying compliant and managing detailed payment work.
Who Do You Pay and How Often?
If you have many different types of payees (like local vendors, global suppliers, or gig workers with special payment terms), it makes sense to streamline the process. An AP team can make sure everyone gets paid correctly and on time, which helps keep your business relationships smooth.
Do You Have Enough Resources?
If your team is small and funds are tight, hiring for a separate AP department may not be the best move yet. Instead, you could outsource the job or assign it to someone within your current team until you’re ready to scale up.
Where Is Your Startup Headed?
Planning to grow fast? You’ll want to build solid financial systems now. A basic AP process in place today means fewer headaches tomorrow. As your business grows, you can expand the AP function as needed.
Wrapping Up
Managing accounts payable well keeps your business healthy and helps you build strong relationships with suppliers. Whether you’re a small startup or a growing company, understanding the functions of AP invoice handling, payment processing, record-keeping, and vendor management will guide you in setting up a system that works. By tracking different types of payables, paying on time, and staying organised, you can avoid late fees, maintain good cash flow, and focus on growing your business.
Need help setting up or improving your AP process? We are here to help you at every stage. Reach out to us and let SAS KPO Services handle your accounts payable so you can stay focused on what you do best.
We look forward to helping your business succeed!
Shivani Soni (Digital Marketing Specialist) writes this blog
