Six must read tips for accounts payable best practices

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By Proformative

We are living in times when there is a ‘best practices’ module in every field. Accounting is a field with written rules (IFRS etc) that must be followed at all times. However, in addition to such rules, there are some other practices that one can follow to further improve the accounting procedures. Explained below are six such accounts payable best practices that every company should follow.

 

Have a clear cut policy

It is very important to have a clear cut policy regarding everything related to accounts payable. It is very crucial to have a well-explained, concrete policy so that there is no vagueness. A policy basically serves like a manual that one can refer to in case any problem arises.

If every accountant/clerk uses the method that suits him/her the best, there will be havoc in the office making it difficult for managers to manage things. With well-explained policies, it is easier to streamline and gauge work.

Some suggested policies include:

• Entering invoices individually and making sure they are logged before approval.

• All invoices having account codes and special handling notes on them.

A business can make policies according to the nature of the business. However, they should always follow accounting guidelines.

 

Have a strong communication process

It is very important to have a strong chain of communication. The policies you prepare must be communicated well to everyone who should know it. There is no point in preparing policies if they are not communicated properly.

Everyone should know his/her job well so that perfection can be achieved. Every point such as method of filing and approving invoices should be clear cut. They should be written in such a way that it is easy to comprehend so that there is no possibility of confusion. 

Additionally, stay in touch with the vendors too. A good option is to send them a welcome letter informing them of the information you need to process their invoices etc. Vendors will also appreciate such a move as it gives them a feeling of security, as they know that the other party is working towards clearing the payment.

 

Have the right person for the job

It is important to have the right person doing the right job. Firstly, the individual who is entering the invoices should differ from the individual who is signing and approving the invoices.  Such a move will help reduce the risk of cheating or scams. Always choose the person who knows the job well and is interested in putting efforts.

 

Always double check

Human errors are very common. It is important to keep an eye on things and double check every figure before noting it down. Additionally, every invoice is required to be noted down as billed, even if the company is not planning to pay the whole amount. In such a scenario, a credit note should be matched and entered against the bill.

 

Avail discounts

More often than not, you might be in a position to avail discounts. The secret lies in paying attention to every invoice and seeing if you are eligible for any discount. Sometimes, vendors offer discounts (such as cash discounts, which are generally based on paying the amount within a specified time) that can help you save money.

 

Gather all the necessary documents

It is important that you keep all important documents (invoices, deposit slips), as they may be needed at a later stage for confirmation or other purposes. Additionally, try to make all the payments from original invoices. However, if this is not possible, make sure you verify your records for the amount and invoice number.

In addition to this, make sure of the presence of a W-9 on file for every vendor before you make the payment. This move will save you from year-end hassle that one has to bear in the preparation of 1099s. You may end up paying hefty fines for a lack of compliance with 1099 requirements for reporting.

Implement these account payable practices in your business and you will find an improvement in your company’s workflow. These points will not only help you keep a tab on everything, but you will also be in a position to save money by cutting down on penalties and availing discounts. The key lies in having well-defined policies and making sure that they are fully implemented.

Sources: wikipedia.org, proformative.com

What is cost accounting?

Cost accounting identifies, documents, implements and resolves business costs for both managerial decision making and financial reporting. Without cost accounting, businesses may have out of control expenses, inefficient business practices, excessive liabilities and no effective cost management systems and solutions. Just as financial accounting is regulated by General Accepted Accounting Principles (GAAP), cost accounting is also regulated by Cost Accounting Standards Cost Accounting Standards (CAS)

Cost accounting that encompasses a process of utilizing cost accounting information for improved business functioning is a helpful if not essential aspect of running a business competitively and efficiently. This article will discuss cost accounting in terms of 1. types of business costs, 2. cost accounting records, 3. cost management systems and 4. solutions for cost management.

1. Types of business costs

Business costs in cost accounting vary from industry to industry and the ideal business has no expenses, which is rare. The different types of costs incurred by a business reflect the management's decision making, the business products and services, and aspects of how a business is operated. Properly identifying business costs is helpful and necessary in preparing and analyzing corporate fundamentals. Some of the business costs handled by cost accounting are listed below:

• Manufacturing costs ex: Nuts and bolts
• Overhead costs ex: Lighting
• Variable and fixed costs ex: Nuts and bolts and salaries
• Direct and indirect costs ex: Paper used for invoices
• Sunk and opportunity costs ex: Investment in equipment

2: Cost statements and documents

What cost accounting also helps with is the recording and documenting of business costs. This process helps track costs every step of the way from origination, through completion of a product manufacturing, sale and service. Cost accounting statements and documents also provide regulators, investors and auditors with necessary financial information with which to analyze the profitability, accounting methods, accuracy and effectiveness of cost accounting systems. A few of the documents, reports and statements used in cost accounting are:

• Schedule of cost of goods manufactured ex: cost of completed product
• Schedule of cost of goods sold ex: costs of sold inventory
• Income statement ex: COG raw materials
• Job cost record ex: costs of work in progress
• Balance sheet ex: product and period costs

3. Different cost management systems:

Cost accounting also uses what is referred to as 'cost management systems'. Cost management systems 1. define how costs are identified, 2. organize the method by which costs are recorded and 3. assist in reviewing and improving business costs. These cost management systems are used in various aspects of business operations to properly account for, record and identify business costs. Some of these cost management systems are cataloged hereafter:

• Actual and normal costing: ex. Average and exact water used cleaning lettuce
• Activity based costing: ex: cost of electricity used shredding
• Product costing systems ex: average cost of boys and girls bicycles
• Job order costing: ex: manufacturing cost for custom furniture
• Cost allocation and cost classification: Cost per apple vs apple picker cost

4. Solutions for management:

Without solutions for cost management, cost accounting hasn't completely fulfilled its task. In other words, identifying, methodologically assessing costs and recording costs do not necessarily help a business improve.  Rather, solutions to cost management problems may be needed frequently or occasionally depending on how much a market and business environment change. With changes in prices, equipment capacity, training, know how and product manufacturing, also come possible changes to the cost accounting that studies these things.

• Restructuring of capital management
• Identification of redundant costs
• Redesign of cost systems
• Improved day to day operations techniques
• Enhanced sourcing and implementation of cost items

Sources: 

1. Hilton, Ronald 'Managerial Accounting: Creating value in a dynamic business environment' 5th ed,  McGraw-Hill, 2002 Chapters 1-6.
2. http://www.fasab.gov/ (Federal Accounting Standards Advisory Board)
3. http://fast.faa.gov/archive/v1198/pguide/98-30C14.htm (Federal Aviation Administration)