What is Accounts Payable?

What is Accounts Payable?  

In its simplest form, ‘Accounts Payable’ (AP) refers to the amount of money that a business owes to its suppliers. There is a strict process involved so that the owed funds are handled appropriately by the AP team. The process is often very manual because rigorous checks are required, and it is an integral part of every company’s finance function.  

Quick sidenote for those curious, ‘Accounts Receivable’ is essentially the opposite of AP and refers to the amount owed to a company, usually by its customers.  

Let’s go over some key terms.  

Invoice: a document that acts as a record of a transaction, sent from a seller to a buyer when an order has been fulfilled.  

Purchase Order: an official document sent from a buyer to a seller. It specifies the items the buyer is purchasing, and the buyer is then obliged to pay the seller for them at a later date. 

Automation: the use of technology where human effort is minimised. In the case of AP, it usually refers to software that performs manual tasks such as reading and keying in data.  

OCR: short for Optical Character Recognition, and is a process that converts an image of text into machine readable text.   

What might the Accounts Payable process look like?  

If you’re working in Accounts Payable at the moment, chances are your process looks something like this:  

1. You receive invoices from suppliers, whether by email or paper copy. 
2. You manually type up the data from the invoices into an accounting system, like Xero, Sage, or Quickbooks. Sometimes AP Clerks will input the data into an Excel spreadsheet or paper record, but this is less common as finance functions have advanced over the years.  
3. You then either match the invoice to a purchase order or receipt.  
4. Once you or a higher-up are happy with it, payments are scheduled and processed.  

In its totality, this can be described as a traditional manual AP process. Despite it being the default, the process is widely considered to be inefficient because of mistakes that can draw out the process, and how long manual data-entry takes to complete and authorise. 

Alternatively, the Accounts Payable process, with the addition of automation software, can look like this:  

1. When you want to buy something, you raise a purchase order using your AP software.  
2. The purchase order is approved in-app after going through checks in a workflow. It is then sent out to the supplier.  
3. Your suppliers email invoices into your AP software  
4. The intelligent software reads the invoice, and automatically matches it to the corresponding purchase order.  
5. You can then make the payment, with confidence. 

If you’re interested in how the Accounts Payable process could work for you with the help of automation, do get in touch with one of our experts. We’re always happy to show you how it works and see if we can help optimise your processes.