Setting up an Accounts Payable System | How-to Guides for running your business from Business.com

Part of keeping your business financially fit means managing all of the bills you owe – a.k.a. your accounts payable (A/P). A/P takes into account every single purchase your company makes, including office supplies, merchandise and equipment. Setting up a solid A/P system will help you keep track of these expenses, verify that you're paying the correct amount and simplify actual bill paying.

Very small operations can get by with a simple manual tracking system, but many business owners are opting for accounting software to facilitate the process. Whether you track A/P by hand or by computer, a good system involves these basic steps:

Draft a purchase order.
Make your purchase.
Record the expense and subsequent payments in a cash disbursement journal.
Record the purchase in an accounts payable ledger.
Balance the ledger and journal against your general ledger.

Action Steps
The best contacts and resources to help you get it done

Consider a software or Web-based system

If you run a one- or two-person shop, a manual system may be sufficient. However, A/P software and Web-based programs make it easier to track, review and pay accounts payable. A major benefit of these programs is the reduction in human error.

I recommend: A/P is a component of numerous popular accounting software programs, such as Peachtree, QuickBooks BIll Pay Service and MYOB. If you prefer a Web-based program, look into ExpenseWatch.com.

Use purchase orders

Purchase orders are the first step in an A/P system. When you decide to buy equipment or supplies, draft a purchase order authorizing the purchase and include the prices to be paid.

I recommend: Create purchase orders using your accounting software, customize a purchase order template included in SmartDraw software or create purchase orders online at LawDepot.com.

Use a cash disbursement journal

Record all purchases, along with all checks written and other payments made, in a cash disbursement journal, sometimes called a checks disbursement journal. Record purchases in one column and payments in a separate column. Be sure to balance this journal with your general ledger — where you record both accounts receivable and accounts payable — each month.

I recommend: If you're taking a manual approach to A/P, order a disbursement journal from Deluxe.com or download one in Microsoft Word format from AllBusiness.com.

Use accounts payable ledgers

Create a separate A/P ledger for each supplier and record all purchases so you can easily determine how much you owe a particular supplier. Balance the totals in your A/P ledgers with your general ledger on a monthly basis.

I recommend: For manual entries, find ledger books at OfficeWorld.com. If you're using software or a Web-based program, the program will help you create the various ledgers for each supplier.

Prevent overpayments and fraud

Implement controls to reduce the chances of overpayments or mistaken payments. Match your suppliers' invoices to your purchase orders to verify amounts due. Avoid duplicate payments by faithfully tracking cash disbursements. To reduce the potential for employee theft, separate duties — have one person write checks and another person sign them. Insist on receiving regular reports of balances and take the time to review them.

I recommend: Generate detailed and targeted reports, such as spending by vendor or budgeted expenditures vs. actual expenditures, with your software or Web-based accounting program.

Maximize your accounts payable

Once you have your system in place, take steps to get the most out of it and continually revisit your processes to refine and streamline them.

I recommend: As a member of The Accounts Payable Network, you can access tips and use online calculators, such as days payable outstanding and payment float calculators, to determine the best management of your accounts payable.

Tips & Tactics
Helpful advice for making the most of this Guide

Always ask if there's a discount for prompt payment of A/P. Some vendors will lower the amount due if you pay within a certain number of days.
Avoid late fees and penalties by paying your bills by the due date.
Even if you use an accounting software program to handle your A/P, continue to hold on to your physical purchase orders, invoices and receipts in case of disputes or tax audits.
Maintaining a good grasp on your A/P will give you a better picture of your company's financial health and help you manage your cash flow more efficiently.

The official source of Setting up an Accounts Payable System is
the Accounts Payable page at Business.com

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