Accounts Payable Department (Payment Department)

What is an Accounts Payable department?

Accounts Payable department (AP) is a part of the finance department. This is the section where all payments to outside is done in the company. Hence accounts payable department has many responsibilities compared to other departments.

Scope of the Accounts Payable department

Scope and size of the accounts payable department depends on the size of the company. If the company is larger, the size of the accounts payable department will be larger. If the company is a small scale size, the scope and the size of the accounts payable department will be smaller. Normally accounts payable department is headed by an assistant manager or a manager and he or she will be reported to head of finance. Accounts payable department has below tasks generally;

Supplier/manual Invoice recording

This is a mandatory task in the accounts payable department. When a supplier is giving a service or good, they are issuing an invoice for the payment too. A team member from the accounts payable department should record the invoice in ledger, once received the invoice. After that they can calculate the aging of the invoice if there is a credit period, company can pay for the invoice in 30days, 60 days, 90 days or after a specific date or they can be paid same time. When an invoice is recorded, a journal entry also recorded in the system same time.

Payments

Accounts Payable team is responsible for issuing the payments to the payable parties such as suppliers, employees. Normally an employee from the Accounts Payable team is doing the payments. Payment officer will issue the payment by any method such as cash, check, online payment or mobile cash. Payment officer is responsible for issuing a payment supporting and he or she should maintain a better supplier relationship too. When recording the payment, the payment entry is paralleled recorded.

AP Reporting

Accounts Payable team is doing several reporting to the management periodically. Normally they show cash outflow, payable reports and insights daily, weekly and monthly.

Payment Methods

Cash

This is the oldest and most trustworthy method to do the payments. Most of the suppliers and payable parties like to get the money to their hand most of the time.

Checks

Check is a more secured method for doing the payment than cash. Checks can limit the payment only to the relevant party & others can not steal and withdraw money easily. Payment issuer also have enough time to stop the payments in any problematic situation.

Online Payment

Online payments are the easiest way to do a payment nowadays. Payment can do without any paperwork and payments can sed within few seconds to the relevant party. Payable parties also very much like in this method, since they can get the payment without travelling distance and touching money.

Mobile Cash

Mobile cash is an innovation nowadays and people can do any payment via their mobile phone.

Hierarchy of the Accounts Payable department

Hierarchy of an Accounts Payable department also depends on the size of the company. Below is an example of the Accounts Payable department hierarchy.

 

Journal Entries associated with Accounts Payable department (AR Entries)

There are 2 main journal entries for Accounts Payable are as follow;

Supplier Invoice Recording

Expense(P&L) Ledger                     Dr

Creditor’s Control Ledger             Cr

Payment

Creditor’s Control Ledger             Dr

Cash/Bank Ledger                           Cr

 

Internal Controls

Management should implement tight and strict internal controls for Accounts Payable, since this is the main cash outflow pipe line in the company. Accounts Payable department should implement proper processes to secure the company’s money. If a proper controlling process has not been implemented, employees can do the frauds and errors. Normally companies implement internal controls in Accounts Payable department with some controls such as;

Checking the payment by next level of hierarchy

Limiting the payment approval amounts to hierarchy levels

Using more than two approval signatures to bank

Bank Reconciliation

New Trends in Accounts Payable

Virtual payment and Invoicing

This method uses many businesses like insurance companies, law firms. They take the details from the suppliers like product and services details and, they invoice or do the payments with some expert knowledge. There is no physical meeting with the suppliers and everything happens virtually via email or any other internet portals.

Shared Service Centers

Giant and multinational companies are practicing this method. According to this method companies are creating a sub company for the shared services like data entry. They pool the AR, AP, GL and other financial department functions are outsourced to this sub company. Then the all the operating entities are getting the service from the initiated company like payments, receipting, invoicing, reporting. By this method companies are receiving many benefits such as;

Low cost due to not having support service staff at the operating entity

Knowledge hub at the shared service center

Low risk of employee turnover

Low cost of labor (If you start the company in a low income or a developing country)

High supervision and high process development