While accounts receivable arise if the date of receipt of services (works, goods, materials, etc.) does not coincide with the date of actual payment. Accounts payable entails the amounts which a firm owes its creditors, and is yet to settle them, the entries in such a file are only removed upon payment.
While accounts payable consists of the obligations of a given individual or entity, accounts receivable represents amounts that should be recovered and is therefore an asset to the organization.
In most cases, expense administration is inter-related to accounts payable, and it is possible for a single accountant to be tasked with the handling those functions. Verification of expense reports to validate the receipts in some sectors such as the airline industry is done by the expense administrator. Such functions and documentation is essential for tax purposes and assists in avoiding reimbursement of erroneous expenses.
In households, accounts payable constitute normal bills such as newspaper subscription, telephone, water or elctricity bills, etc. And these are generally liquidated promptly with a few allowed to go into arrears, which can be costly due to the interest charged on such amounts.
On the commercial front, the number of services is usually much more comprehensive, and these are tracked by the accounts department either manually or via automated accounting systems.
The entire process of tracking invoices and effecting payments works seamlessly between electronic and manual or paper elements.
Typically, the supplier will forward the merchandise and release an invoice to collect payment afterwards. In principle, this outlines a cash conversion cycle, within which the supplier has spent money on the raw materials and he is yet to receive payment, to realize a return on his investment.
Upon receipt of the invoice the customer validates the packing slip and purchase order, to ensure accuracy after which payment is forwarded (otherwise known as the three-way match).
In the accounts department, the vendor’s bank account, name and amount, creates a data file containing information such as payment date, the data files, which is therefore the account of the vendor.
An assortment of verifications of improper actions on the part of accountants are always in place to guard against fraudulent activities, which can cost the company dearly. Hence, the use of segregation mechanisms which are intended to create ‘fraud busting’ separation of duties among the staff.
Almost all firms implement a junior staff procedure which involves reviewing and signing of checks only by a senior employee. The accounting software is typically programmed in such a way that limitations are placed on each employee’s functions and/or access. The most sensitive tasks are always handled by more than one person, thus minimizing the opportunity for dubious transactions (embezzlement) to see the light of day.