It’s very practical…. Accounts Payable

Using Accounts Payable to record expenses? It may not be necessary for everyone, but there are benefits to consider:

1. Accuracy – Report expenses when they’re incurred rather than waiting until they are paid, which makes your books more accurate. 
2. Simplicity – Record all expenses through a single account for audit and reconciliation tasks.
3. Efficiency – Streamline accounting processes (printing cheques en masse rather than one by one), making cash flows more predictable.
4. Security – Use Accounts Payable to segregate accounting duties, which reduces the chance of fraud.

What does it look like?

Essentially, we’re talking about cash reporting vs. accrual reporting. By using Accounts Payable, you can easily report your income and expenses with the accrual method of accounting if necessary. You can also use a special set of line types in your transaction entry window: CN+ and CN- (credit notes). You can see them in the transactions below.

Learn more about CN+ and CN- with Steve Tippe from the FCC Software Customer Care Team

In AgExpert Analyst, you can take some of the adjustment work out of the typical process. You can let the Income and Expense Report and the General Ledger Report be generated by either the accrual or cash method of accounting automatically. The accrual version includes expenses that are currently unpaid in Accounts Payable; the cash version ignores those outstanding items. You have the best of both worlds. Report expenses in a way that makes sense for your business management and still easily convert those reported expenses to the cash method for income tax reporting.

Practically Speaking

Let’s run through a full transaction cycle for a supplier.

1. Put a deposit down on next year’s inputs. By using a credit note into Accounts Payable, you defer the expense to next year. Because no expense has been posted, no expense will be reported in 2017.
   
2. In the new year, after picking up fertilizer from the supplier, you can enter the invoice as a Payable Charge. Note that at this point, no additional cash is changing hands. The accrual reports show the $10,000 expense in March, even though you haven’t paid yet.
   
3. By applying the 2017 credit note entry against the outstanding $10,000 invoice, the cash report will now show a $5,000 expense. Important: the only way to use a balance entered as CN+ is to have an offsetting CN-. Amounts entered as credit notes do not count as charges.
   
4. Sometimes you’ll return a purchased product to the vendor for credit. In those cases, enter the return as a negative Payable Charge instead of using CN+. This will record the proper credit to the expense account. In this same vein, you can enter overpayments as negative payable charges if you’d like to see the activity in your Aged or Charge Reconciliation reports.
   
5. Finally, it’s time to pay the remaining outstanding balance on the account. When applying the payment, it’s important to apply it against both the return and the remaining balance from the original invoice.
   
6. If you leave the balance unpaid past the end of the next reporting period, typically the fiscal year-end, make sure to update Accounts Payable to reflect that there’s only a remaining $4,000 balance from the original invoice. (Apply the return against the remaining invoice balance.) By doing this, you ensure that your Accounts Payable Aging and Charge Reconciliation reports are correct.
   

Best Practices

• Set up cheque printing and then establish a cheque run schedule and stick to it as best you can. There will always be items that can’t wait until the 15th or the end of the month – sometimes not even until next Thursday. Just take care of those few items with a handwritten cheque and then make the transaction entry into the program when you’re next sitting down at the computer.
• Post your invoices frequently. Not having a stack of papers with due invoices waiting for you on the desk is a wonderful feeling.
• Periodically reconcile your busiest accounts to your vendor statements to make sure that nothing has been missed. The Accounts Payable Charge Reconciliation report is a favourite of ours for this because it matches the invoices entered with the payments that have been applied against them.
• Top Tip – Review all outstanding items as part of your Year-End process. The Accounts Payable Aged report works great. Make sure that the outstanding items really are outstanding. For instance, you may have a credit note or a return credit outstanding that brings an account down to a $0.00 balance, but if the credit and the invoice it zeroes are both outstanding, the expenses related to those items will not report correctly. Clear them against each other using the method demonstrated in transaction #6.
• Apply the same principles and practices to your income by using Accounts Receivable.