Catalog / Accounts Payable/Receivable Cheat Sheet
Accounts Payable/Receivable Cheat Sheet
A comprehensive cheat sheet covering the essentials of Accounts Payable (AP) and Accounts Receivable (AR) in accounting and bookkeeping. This guide provides a quick reference to key concepts, processes, calculations, and best practices for managing payables and receivables effectively.
Accounts Payable (AP) Overview
AP Fundamentals
Definition: Accounts Payable (AP) represents the short-term liabilities a business owes to its suppliers or vendors for goods or services received but not yet paid for. |
Purpose: Managing AP efficiently ensures timely payments, maintains good supplier relationships, and optimizes cash flow. |
Key Documents: Purchase orders (POs), invoices, receiving reports, and payment vouchers. |
Core Process:
|
Invoice Processing
Invoice Receipt |
Collect invoices from suppliers via mail, email, or electronic data interchange (EDI). |
Invoice Verification |
Ensure invoice accuracy by matching details against POs and receiving reports. Verify quantities, prices, and terms. |
Data Entry |
Input invoice information (vendor, date, amount, due date) into the accounting system. Code to the appropriate GL accounts. |
Approval Workflow |
Route invoices for approval based on predefined rules. Approval thresholds may vary by amount or department. |
Payment Scheduling |
Schedule payments considering due dates, early payment discounts, and cash flow projections. |
Important AP Metrics
Days Payable Outstanding (DPO): Measures the average number of days a company takes to pay its suppliers. |
Invoice Processing Time: Time taken from invoice receipt to payment. |
Payment Error Rate: Percentage of payments with errors or discrepancies. |
Accounts Receivable (AR) Overview
AR Fundamentals
Definition: Accounts Receivable (AR) represents the short-term assets a business is owed by its customers for goods or services delivered but not yet paid for. |
Purpose: Managing AR effectively ensures timely collections, reduces bad debts, and improves cash flow. |
Key Documents: Sales orders, invoices, customer statements, and credit memos. |
Core Process:
|
Invoice and Collection Process
Invoice Generation |
Create accurate invoices promptly after providing goods/services. Include all necessary details (customer info, items, prices, terms). |
Invoice Delivery |
Deliver invoices to customers via preferred methods (email, mail, online portal). Confirm receipt to ensure awareness. |
Payment Collection |
Offer various payment options (credit card, ACH, check). Record payments accurately and promptly upon receipt. |
Overdue Follow-Up |
Implement a system for tracking overdue invoices. Send reminders and escalate collection efforts as needed. Document all communication. |
Dispute Resolution |
Establish procedures for handling invoice disputes. Investigate and resolve disputes promptly to avoid payment delays. |
Important AR Metrics
Days Sales Outstanding (DSO): Measures the average number of days it takes a company to collect payment after a sale. |
Bad Debt Ratio: Percentage of AR that is deemed uncollectible. |
Collection Effectiveness Index (CEI): Measures the efficiency of collection efforts. |
AP/AR Reconciliation & Reporting
Reconciliation
Purpose: Ensure the accuracy of AP and AR balances by comparing them to supporting documents and bank statements. |
AP Reconciliation: Match AP ledger balances with vendor statements. Investigate and resolve any discrepancies. |
AR Reconciliation: Compare AR ledger balances with customer account details and bank deposits. Investigate and resolve any discrepancies. |
Frequency: Reconcile AP and AR accounts regularly (e.g., monthly) to identify and correct errors promptly. |
Reporting
AP Aging Report |
Categorizes AP balances by due date ranges (e.g., current, 30 days overdue, 60 days overdue). Helps prioritize payments. |
AR Aging Report |
Categorizes AR balances by age (e.g., current, 30 days overdue, 60 days overdue). Helps identify slow-paying customers and potential bad debts. |
Cash Flow Forecast |
Projects future cash inflows from AR collections and cash outflows for AP payments. Supports cash management decisions. |
Vendor Analysis |
Analyzes vendor performance based on factors like pricing, delivery reliability, and payment terms. Supports vendor selection and negotiation. |
Customer Analysis |
Analyzes customer payment behavior, creditworthiness, and profitability. Supports credit policy decisions and sales strategies. |
Best Practices & Internal Controls
Best Practices
AP Best Practices: |
Centralize invoice processing to improve efficiency and control. |
Take advantage of early payment discounts to reduce costs. |
Automate AP processes (e.g., invoice capture, approval workflows) to streamline operations. |
AR Best Practices: |
Establish clear credit policies and terms to minimize payment delays. |
Offer multiple payment options to facilitate timely payments. |
Implement automated reminders and collection processes to improve collection rates. |
Internal Controls
Segregation of Duties |
Separate responsibilities for invoice processing, payment approval, and bank reconciliation to prevent fraud and errors. |
Approval Authority |
Define clear approval limits for AP invoices and AR credit memos to ensure proper authorization. |
Regular Audits |
Conduct periodic audits of AP and AR processes to identify weaknesses and ensure compliance with internal policies and regulations. |
Document Retention |
Maintain organized records of all AP and AR documents (e.g., invoices, payments, correspondence) for audit and compliance purposes. |
System Access Controls |
Restrict access to AP and AR systems based on job responsibilities to prevent unauthorized transactions and data breaches. |