Accounts Payable 101

The process of incurring debt obligations for goods and services,  and then paying your bills in a timely manner, is known as Accounts  Payable.  The Auto Shop Writer system simplifies this task to the greatest degree possible, and should prevent your shop from  incurring a  bad reputation for lack of prompt payments.

When you personally assure your vendors that you promise to pay your bills within a given period of time, the debt is known as a  'payable.'  It is based on the concept that they promise to provide  goods and services now for the promise of a payment in the future.  These must be tracked carefully, and processed in a timely manner.  If you follow regular, and clear, payment procedures, you will not  only have fewer late payments, but you will enjoy a more positive  relationship with your vendors and perhaps better credit terms.

To ensure proper logging of payments, and credits, your payables  should be placed on a ledger.  To easily track the status of your  obligation to each vendor, the ledgers should be based on individual  account listings.  This way, it is possible to view the current  credit received, and your payments, to know exactly what each vendor  is owed.

The charges and payments are also posted to the General Ledger.  When an invoice is charged to a Payable Account, the amount is  listed as a Liability (credit), and balanced as an Expense item  (debit).  Further discussion of these terms is provided in the  General Ledger chapter.  When a payment is made, it is removed from  the Liability column, and becomes a credit against the Bank Account  from which the check was drawn.  Remember that the Bank Account is  an Asset (debit), and a credit decreases the balance.

During the month, all of the transactions that take place are logged  into the payables.  This includes all charges, and payments.  At the  end of the month, it is important to review a worksheet which lists  all charges, and payments, made against the account.

The vendor  will send you their complete listing of the activity on their  account, which is a statement of your status.  Although you have  received individual invoices, it is good practice to provide a  summary of each item on the statement, and then to provide totals.

There are two types of statements.  The first is balance forward,  which provides a balance total at the beginning of the month, and  then itemizes all of the account activity.  Once the statement is  mailed, the month is closed and a new beginning total is obtained.  This is the system used on most 'revolving' charge card systems, ie.  personal credit cards, department store credit, and gas cards.

Small businesses are displaying a preference for the other method of  accounting, known as open item.  Using this method, as an invoice is  paid off, it is removed from the statement.  This is particularly  good when tracking payments.  Many companies now like to pay off  particular invoices with a specific check, and may hold payment on others for specific reasons.

Accounts Payables are aged to determine how long credit has been extended by the vendor for certain invoices.  Normally, reporting is  provided for 0-29 days, 30-59, 50-89, and 90 plus.  The first period  is the current due, and usually reflects the amount that is being  billed on the statement for the first time.  Amounts in the other  categories may be overdue, depending on the terms of the account.

There are several terms which are standard for payment.  Many of  your vendors are probably on a Cash On Delivery basis.  However,  some may have granted you net terms.  This means that you owe the  net amount within a specified amount of time.  Net 15 is quite  common for small company billing.  Most credit cards are due in net  30 days, after which time interest, and late charges, are accrued  (added on).

Some companies extend favorable terms for payment  within a certain period of time, which may be a discount on the  total bill.  2 or 3 percent is not uncommon for payment within 15  days.

When accounts exceed the net terms, they become delinquent.  At this  point, the funds need to be collected.  Usually gentle reminders are  all that are needed to obtain payment.  However, repetitive delays  in payment may mean that the vendor will restrict further credit,  and perhaps initiate collection procedures.

This is a brief summary of Accounts Payable procedures and terms. Your local bookstore, or library, may have excellent resources that  review, and demonstrate, these principles in great depth.

Using Credit

While not being credit experts, there are some general comments we  suggest for using credit.

Many businesses like to have an account with their service and goods  providers.  It is a simple manner of bookkeeping.  Their businesses  run on a cash basis - but its far easier to pay a bill once a month for a number of invoices rather than write a check every time a  service is provided, or goods received.

The concern is that many businesses become slow payers, and are  overextended with the credit they receive.  They end up in court  because they become overwhelmed with the bills that have been left  unpaid.

Credit is a very special, and risky, commodity.  It is like a unique tool.  You don't necessarily use it every day, but you keep it  protected so that it is available when the need arises.  Prompt, and  complete, payment of your bills assures good credit availability in the future, even during economically slow times.

The important  issue about credit is that you have to use it in order to get it -  but if you don't use it just right, you lose it.

When incurring obligations, always keep in mind the realistic amount you can repay  within the contracted time period, and within your current earnings  picture.

Some people borrow money as a seed to improving their  business, and without a solid business plan, they encounter serious  financial difficulties.