Last updated by
June 10, 2022
Accurate financial information is critical to business management and one aspect of that financial information is accounts payable.
Accurate financial information is critical to business management and one aspect of that financial information is accounts payable. Knowing how much you owe vendors is as important as knowing how much customers owe you. Hence, reconciling accounts payable regularly is essential.
Accounts payable is reconciled by comparing the accounts payable ledger to the accounts payable balance on the balance sheet. This may seem simple but there is actually more to it than just comparing totals.
If you keep track of your accounts payable manually you may face a few more reconciliation challenges as differences will creep in. If you are using an automated system much of the work is done for you and you will face fewer issues.
So, this article will help you understand aspects of accounts payable that will help you in the reconciling process. Things such as what is included in accounts payable, what is the accounts payable ledger, what are common mistakes that cause differences and how exactly does the accounts payable process work.
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Table of contents
First you need to be sure to understand accounts payable. Accounts payable is the amount owed to vendors for the purchase of goods or services on credit. It represents an agreement to pay for those goods and services in the future. Typically, accounts payable are paid within 30-60 days of the purchase and never longer than 1 year. Accounts payable represents the combined total of all unpaid invoices owed to vendors.
Accounts payable may include bills for things such as utility payments, internet services, rents, and purchases of raw material used in the normal operation of the business.
Accounts payable is classified as a liability and shows as a credit on the balance sheet.
Accounts payable is the total amount owed for the purchase of all goods and services. Since this may include many vendors and many invoices the way all these separate invoices are tracked is through the accounts payable ledger. The accounts payable ledger lists each vendor and each vendor invoice separately. It is a critical tool in reconciling accounts payable. See the sample accounts payable ledger below.
Note, there are 5 vendors, individual invoices for each vendor, the invoice date, invoice number and the invoice amount. At the bottom is the total accounts payable balance that should match the balance on the balance sheet. Keep reading to see a sample balance sheet and to match the accounts payable ledger total to the balance sheet accounts payable total.
Since the accounts payable ledger includes all unpaid invoices, the total of the ledger should agree with the total balance on the balance sheet.
See the condensed balance sheet below. The balance sheet only shows the liabilities section. Assets would come above and equity would come below. Then look at the ledger above noting the $4,122.75 balance. Compare that to the Accounts Payable balance on the balance sheet noting the numbers match.
If the numbers don’t match then comes the reconciliation. There may be several reasons why they don’t match.
Yes, vendor statements are very valuable. Typically, at the end of each month, a vendor will send you a statement identifying all unpaid invoices due from that company. The purpose of this is to verify you and them agree on what is owed. The statement will include each invoice.
It is important to match the details of the statement to the details of the accounts payable ledger to ensure all unpaid invoices have been recorded and recorded at the correct amount. In larger companies with many moving parts, invoices often don’t find their way to the accounts payable department to record. The same could happen in smaller companies as well, so a vendor statement is a good check and balance.
Accounts payable is a key component in managing cash flow; therefore, it should be maintained and reconciled regularly. Since accounts payable represent cash to be paid in the next 30 days if it is understated you may overspend and not be able to pay upcoming obligations. Employees would not be happy if you missed their payroll. If accounts payable is overstated and your cash doesn’t cover the amount you may decide to delay payments to vendors creating poor relationships.
Another critical reason why you should reconcile accounts payable is to build trust amongst stakeholders and vendors.
Without trust, vendors and suppliers may refuse to sell to you on credit. This affects cash flow. Without trust, stakeholders may question your ability to manage other aspects of the business and withhold future investment and restrict your decision privileges.
What is the accounts payable process?
Understanding the accounts payable process will help you in the reconciliation process because it helps you know how documents are originated and flow through the company. Here is a brief summary of that process.