Accounts Payable Process - Definition - Meaning - Explanation - Steps

By Accounts Payable Process we mean a way in which we are purchasing goods or products from our Supplier or Seller or Accounts Payable On Account or Credit Basis for the purpose of selling.

Below are the steps taken place during the Accounts Payable / Sundry Creditors Process.

1. Purchase Order From Buyer

Accounts Payable Process Or Purchase Processing starts with the order of goods from the buyer who writes the order on a form provided by Supplier or Vendor or the buyer himself made an order written on a form and sent it to supplier either by physical visit to the location of business place, by email, by post, telephone or mobile phone devices or any other available sources which he likes.

You Can Also Study, “Accounts Receivable Process”

2. Verification of Purchase Order By Receiving Department

After receiving the order, the Receiving Department confirms the order as this order is an evidence from buyer that he is willing to purchase goods on the listed price. He creates a duplicate copy of this order and kept for evidence and for other office use.

An invoice is prepared for the delivery of the goods ordered according to buyer’s intimation. This invoice is a Sales invoice for seller and Purchase invoice for buyer. This invoice acts as an evidence and helpful in recording Transaction of Credit Purchases in the Purchase Day Book of business. The invoice contains the following:

(i) Names And Addresses of Buyer And Seller

(ii) Date of Transaction

(iii) Terms & Conditions

(iv) Quantities, Description And Prices of Goods / Products

(v) Mode of Shipping

The quantities, prices of goods / products, method of shipping mentioned on invoice should be compared with the Lists shown in the Purchase Order of buyer.

3. Verification of Purchase Order By Purchasing Department

The Receiving Report which is prepared by Receiving Department is sent to Purchasing Department. Such report is basically the carbon copy of Purchase Order or an invoice prepared by the seller. Purchasing Department also verifies the quantities, prices, descriptions and other necessary requirements of invoice with the list details of purchasing order.

4. Recording Credit Purchases In Purchase Day Book

The accounting department records credit purchase in purchase day book with the help of copy of invoice and purchase order. The Journal Entry of purchased goods from supplier is recorded as shown below:

                                        Purchases a/c     XXX

                                                              Accounts Payable / Creditors a/c    XXX

(Goods Purchased on Credit)

This business transaction is firstly recorded in the Subsidiary Ledgers of Each Suppliers and final closing balances are collectively transferred to Accounts Payable Control Account from where the Ending Balance is transferred to Balance Sheet at the end of Accounting Period.

5. Delivery of Goods / Products

The transportation cost is borne by the seller if he offers free shipping, otherwise, transportation cost (Carriage Inward) is added to the Cost of Merchandise and it is mentioned on invoice. It is a Direct Expense for seller if he bornes it and deducted from Purchases in Income Statement, otherwise, it is a direct revenue if it is borne by the buyer.

Now the goods or assets are ready for shipment to the place of buyer mentioned on purchase order. So, Accounts Payable Process is the way in which a buyer purchases goods / products or Assets from supplier. The buyer purchases goods for reselling purposes but supply assets for use in the business for the running of business operations.