Accounts Payable Terms and Procedures for New Accounts or Existing or Inactive Accounts

Accounting controls protect employees as well as the company.

Accounts payable is the function in the accounting department that handles all expense payments for the company. Accounting controls are set into place to ensure no one person handles all the activities of the process, such as one person may enter invoices into the system and print the checks, but another will approve and sign the checks for payment. These accounting controls protect the company and the employees against errors and embezzlement.

Accounts Payable

Accounts payable refers to the expense side of the accounting function within a company. Vendor invoices, employee expense reimbursements, payments to independent contractors or fixed and variable expenses such as rent, utilities, office supplies and more all undergo processing through accounts payables in accounting. Accounts payable also processes the payments for these vendors, entering all information in the AP module of the accounting system software.

Setting up New Vendors

Setting up a new account for payments depends upon the type of the vendor being paid. Establishing a new vendor in the system requires the vendor to meet the company's qualifications for payment, which may include a contract or signing of a "Terms and Conditions" agreement, references and proof of business insurance. The vendor must submit IRS Form W-9, which the IRS requires updated every three years and includes the company's formal business name, company status, along with its IRS-obtained tax identification, employer identification or Social Security number. Once qualified, the vendor's information is input into the accounting's AP system, including the W-9 information for year-end Form 1099 reporting, the correct payment terms and the name under which checks are cut along with the company's mailing address.

AP Processing for Existing Vendors

For qualified vendors, invoices are date-stamped with the date of receipt and coded for the expense item according to the proper chart of accounts account number. A stamp or invoice voucher provides the fields for coding the entry for expense distribution. The invoice is then entered into the AP system for payment, date stamped and initialed by the person entering it into the system and filed to wait for payment. After producing checks, the AP person matches the invoices and checks, attaching them together with a paper clip. A separate and approved person reviews each check and its backup for signature and approval. Once approved and subsequently signed, the AP person removes the file stub from the check and staples it to the invoice for filing. Checks are mailed.

Inactive Accounts

Generally, most companies keep two years of master vendor payment files available for access and research as needed. All vendor files outside this period undergo archiving and storage for seven years before destroying. Some companies may elect to put files on microfiche to have permanent records. Generally, inactive vendor accounts close after a set-period, determined by company policy, but the company keeps account records for seven years.

Terminology

Terminology involved with accounts payable involves "Payment Terms," which may be set at Net-10, Net-25, Net-30, Net-45 or Net-60, depending upon the agreement made with the vendor; "Net" referring to the amount due after applying any discounts or credits. Other terms include "Accounting Period," which delineates the accounting period of activity, usually a month at a time and "Aged AP report," a report that indicates the outstanding AP invoices entered into the system but not paid.

References

• The Accounts Payable Network: Answers to Accounts Payable Questions
• The Accounts Payable Network: AP Best Practices - Processes
• Truman State University: Glossary of Terms