Step 1. Create your chart of accounts
The first step of the accounts payable process is to create a chart of accounts, which is an organizational chart that summarizes where you record accounting transactions.
Generally, a chart of accounts will have five primary account types:
- Income accounts
- Asset accounts
- Liability accounts
- Expense accounts
- Equity accounts
Each account category will have different account names with an associated account number and financial statements. You can also create subcategories to further divide and make them more organized.
Step 2. Assign vendor details
Next, you should assign vendor details to help you keep track of orders and payment deadlines, then assign codes to remind you about future payments.
Here are some vendor codes you can use:
- Net 10: Payment is due in 10 days.
- Net 30: Payment is due in 30 days.
- Net 60: Payment is due in 60 days.
Assigning codes organizes accounts payable processing so you know when to expect payments. Using accounting software for this step allows you to automatically track payment terms and assign payment due dates.
Step 3. Invoice approval
Before initiating payment, you’ll want to review your invoice for accuracy and ensure you’ve received the product or service requested. You can use the three-way match to verify the invoice before paying them.
Here’s how the three-way match accounts payable process works:
- Purchase order: Use this official order confirmation to verify the quantity, cost, and payment terms.
- Order receipt or goods received note: Ensure the vendor delivers the purchase correctly.
- Invoice: Confirm the amount you owe and the payment terms.
Once you ensure the invoice is correct and approve it, you can record the invoice information in your accounting software, including the invoice number, the amount due, and the due dates.
Step 4. Process payment for outstanding invoices
After verifying the accuracy of your invoices, you can initiate invoice payments to the appropriate vendors. Depending on the vendor’s preference and your payment method, you may need to notify them that payment is on its way.
Review your accounts payable weekly to ensure there are no outstanding payments and to confirm you completed the payment.
Step 5. Record and repeat
Once you’ve completed these steps, it’s time to update your books to reflect the most current information. After a vendor payment has gone through, you can remove it from your list of accounts payable. Then repeat this process weekly.
You can automate reconciliation with accounting software to ensure you’re paying vendors on time to avoid late fees.
Why is the accounts payable process important?
The accounts payable process plays an important role in your business’s accounting operations for several reasons.
Here’s how implementing an accounts payable process can benefit your business:
- Better manage finances: Knowing what you owe helps you better understand how to manage your business’s finances. You can avoid errors and strategize your spending and saving while easily settling your debts.
- Boosts relationship with vendors: Recording and making timely payments is a great way to facilitate positive vendor relationships.
- Helps save money: Some vendors implement late fees for late payments, while others offer early payment discounts for settling up ahead of time. Keeping track of your amounts due can help you save money.
- Keep historical records: Recording invoice data provides organizational peace of mind and creates a clear picture of the transaction history. A detailed database of your outgoing payments can help you identify and resolve spending issues more efficiently.
Keeping your accounts payable organized and in check helps you maintain accurate records in case of a tax or business audit.