Last month we explored Accounts Receivables and highlighting incoming billable funds from clients. This month we’re looking at Accounts Payable.
SO! What does Accounts Payable Mean and How Does it Help Me?
In short, accounts payable is the account that tells you who and how much YOU owe to your vendors.
In a service-based business, if you have COGS set up you can track the cost of your services and projects. The cost will go straight to COGS and Accounts Payable and skipping the inventory. Inventory is only for product-based businesses.
When you enter an invoice, (bill), from your vendors into your accounting software it will hit the expense (admin cost) or the inventory account on the balance sheet. When you sell the item in inventory it comes out of inventory and hits the COGS account.
The Accounts Payable report will tell you who, when and how much you owe each vendor.
Having this information at your fingertips will help better plan so you can pay your bills on time. But it also highlights whether or not the vendor has a discount day and if you’re able to take the discount and pay your bills less the discount.
When you’re able to pay your bills on time you will get a better credit rating with your vendors and as your business grows it be able to increase your credit limit. It is important to keep up to date with your vendors. Better credit ratings with your vendors can afford you other benefits as well. If there’s ever a time when you need help with a deadline extension, your vendors will be more willing to work with you if you have a good credit history with them.
By entering all your bills into your account managing software or registries you will be empowered with the right information to let you compare the bills entered in against the bank, credit statements or individual vendor invoices you receive. That way, at the end of the month (or billing cycle) you can find missing invoices or missing payments should a circumstance arise.
TIP – To help you avoid potential accounting errors, never pay outstanding bills payable from a statement, only pay from the individual invoices received from the vendor. This way you have looked at each invoice to make sure you have reached all of the expected product and can verify the prices are what you had planned for.
FOR more tips or assistance on tackling your company’s Accounts Payable, contact Carefree Bookkeeping today!