As one of the biggest sources of liabilities on the balance sheet, accounts payable accruals can spur your company’s growth—or hobble it. Accurately tracking and maintaining your accounts payable balance prevents cash underruns, unwanted fees, and friction in your procurement process, all of which destroy progress. 

Finance's accounting method may also impact the accuracy and stability of your financial reporting. For example, since it's straightforward, many small businesses and startups run financials using the cash basis of accounting. But as a business becomes more complex, a more accurate and compliant accrual method of accounting is preferred.

In this article, we’ll discuss the accrual method of accounting and the importance of accounts payable accruals in maintaining stable and accurate financials for your business. By the end of this article, you’ll understand:

• Cash versus accrual basis of accounting
• The importance of accruals to your accounts payable reporting
• Tips on managing accounts payable accruals
• How procurement software helps maintain accurate AP accruals

First, let’s clarify the difference between cash and accrual basis of accounting.

Download the free tool: Invoice Tracking Template

Accounting methods and terms explained

In its simplest form, accounting is the process of recording the money a company makes and spends. 

• Money made (from any source) is called revenue. Revenue is the gross income a business makes before it subtracts expenses. 
• Money spent (for any purpose) is called an expense. A company generates expenses for overhead (general business costs), wages, materials, and production. 

There are two methods an accountant or CPA uses to record the money coming into and out of a business. These are called the cash basis of accounting and the accrual basis of accounting. 

The cash basis of accounting works as follows:

1. When you receive money, you record it as revenue. 
2. When you spend money, you record it as an expense.

While this is a simple way of looking at financials, the cash basis isn't accurate enough for businesses with more complex financial activity. Cash basis accounting does not meet the standard for Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). 

These businesses use the accrual basis of accounting:

1. Income is recognized when earned. This may or may not be when you are paid. For instance, you might receive payment via a yearly contract with quarterly retainer payments.
2. Expenses are recognized when they are incurred. This may or may not be when you pay the invoice. For instance, you may order inventory on credit to be delivered later. 

Ebook

Invoice Tracking Template

Download the invoice tracking template to avoid costly mistakes, clarify financial patterns, and track spending throughout the year.

Download the tool

Why should you use the accrual basis of accounting?

The reality of business transactions is that bills aren’t always paid as soon as services are rendered or products are delivered. But a large bill to be paid later still affects your company’s financial picture. 

Cash basis accounting records a change only when the bill is paid. With accrual accounting, revenue and expenses are recorded when they occur—rather than when payment is made. 

Even if a short-term liability isn’t due to be paid for 60, 90, or 180 days, it still appears on your balance sheet as a liability, so you know it’s on the horizon.

This gives you a clearer picture of your accounting. But it also makes things a little more confusing and requires extra bookkeeping. 

In accruals basis accounting, you must reconcile credit and debit information for accounts receivable (revenue) and accounts payable (expenses) at the end of the accounting period. 

Adjust the balance sheet when payment is made to ensure it matches what was previously recorded by creating a journal entry to adjust the general ledger (GL). These adjustments are called accruals.

Tips on managing accounts payable accruals

To understand accounts payable accruals further, let’s focus on expenses recorded under the accrual method. 

Some of these are consistent, ongoing expenses. The cost of utilities and upcoming employee wages are examples of these expenses. 

Goods or services provided by a third-party supplier may also be consistent and ongoing, but these are accounts payable accruals. Accounts payable refers specifically to short-term debts (those repayable within 12 months) owed to vendors. This differs from notes payable, which refers to long-term debts whose payment occurs over a longer period. 

Like accrued liabilities such as loan payments and wages, accounts payable count as current liabilities. But often, these payments are harder to track and reconcile than recurring, predictable expenses like payroll or loan payments. Developing an effective strategy for these is essential to avoid running afoul of financial regulations. 

Let’s look at how a business can take steps to improve the accuracy of its accounting.

1. Verify the accrual invoice, vendor, and goods

Accuracy and timely delivery of orders are essential to maintaining strong financial performance. When ordering supplies, services, or products, it’s important for purchasing and AP departments to verify and reconcile the goods delivered against the goods ordered. 

This process is called three-way matching. It verifies that the purchase order, invoice, and receipt of goods (sometimes called a bill of lading) all match—including price, terms, item quantity, and item quality. 

2. Increase scrutiny on large orders and unknown vendors

When working with or processing invoices from a new or unknown vendor, take time to verify that the invoice is tied to an actual order that has been received, accepted, and reconciled. Not only does this increase the accuracy of your financial statements, but it also detects and prevents procurement fraud. 

Another way to prevent fraudulent activity is to segregate reconciliation duties in your organization. Different employees should review accrued expenses, adjust entries, reconcile orders, and verify vendor information. An accounts payable audit program improves accuracy and dissuades bad actors from perpetrating fraud. 

3. Make review part of month-end close activities

Month-end closing is vital to the financial health of your organization. A robust month-end close process covers all the bases with your vendors and short-term liabilities. Reviewing your cash accounts and accurately reconciling AP and AR accruals is key to a smooth month-end close. This practice ensures the numbers accurately reflect your current financial position.

• A robust month-end close process reduces the time-to-close, saving money and allowing AP teams to focus on other high-priority activities. 
• Accurate month-end closing figures translate to strong and accurate financial statements. 
• Accurate financial statements empower business growth through stabilized cash flow, access to loans, and attractiveness to potential investors. 

Ebook

Invoice Tracking Template

Download the invoice tracking template to avoid costly mistakes, clarify financial patterns, and track spending throughout the year.

Download

"*" indicates required fields

First Name*

Last Name*

Company*

Email*

Phone

Comments

This field is for validation purposes and should be left unchanged.

How Order.co manages AP accruals

The accuracy of your company’s income statement, balance sheet, and cash flow statement relies on accurately keeping track of your short-term liabilities. If you don’t properly track and reconcile expenses, your end-of-the-year financial outlook will not accurately reflect how your business performed. 

Procurement software automates that workflow and removes human error. Using Order.co to automate and streamline purchasing:

• Enables automatic approval, purchase order, and three-way matching workflows to ensure accuracy of purchases and payments
• Reduces human error and procurement fraud that damage financial performance
• Creates an accurate record of your purchase history, spend management, and procurement reporting for future analysis
• Centralizes data used for reconciliation and financial reporting at month end 

Would you like to learn more about using procurement software to make managing accounts payable accruals easier? Schedule a demo of Order.co today.

Business success demands effective decision-making, on-time reporting, and accurate data entry. Still, sometimes errors enter the system—and poor invoice processing is a primary reason.

Users may not discover inaccuracies caused by an incorrectly processed invoice until they prepare the accounts payable (AP) trial balance. This leads to late reporting and delayed decisions. If no one discovers the errors, executives might make decisions based on inaccurate reports.

Accuracy in accounts payable trial balance is crucial. It positively impacts working capital to improve operational control and future planning. To demonstrate how your business can ensure an accurate trial balance and improve processing (so you can reap the rewards of control and planning), we discuss:

• AP invoice processing and AP trial balance preparation
• The value derived from improved invoice processing
• Nine common causes of inefficient, multi-site processing
• How accounts payable trial balance errors impact your vendors
• The solution for first-time-right trial balances and how Order.co helps you deliver them

Download the free ebook: How Automation Can Solve Finance Teams’ Biggest Challenges

What is an accounts payable trial balance?

The accounts payable trial balance—also called the accounts payable trial balance report—is a listing of the end balance in the chart of accounts. It includes subtotals for partial and unpaid invoices appearing on each general ledger (GL) account. 

The AP trial balance enables accounting to post payable liabilities to the general ledger. Accurate and comprehensive inclusion of those payable liabilities helps the business reconcile initial journal entries, bookkeeping records, and sub-ledger balances with bank statements and other documents. The amounts are later totaled and posted to the correct general ledger account. They eventually appear as current liabilities on the balance sheet.

Trial balance and invoice processing: The main points to consider

The C-suite creates business success by ensuring all external and internal actions deliver intended results efficiently and accurately. Every aspect of corporate finance significantly impacts outcomes, particularly the AP process. While accounts payable is only part of the overall accounts structure, effective invoice processing is a valuable subtask to prioritize.

Invoice processing improves when your accounts payable account is accurate, fully inclusive, and timely. Therefore, accuracy and transparency become the norm across the entire accounts payable processing system. Together, they enable greater accuracy to support C-suite decision-making. 

Here are some common positive outcomes of accurate accounts payable:

• Operations maximize working capital
• Companies allocate funds to spur growth versus maintaining current operations
• Vendor relationships improve
• Accounting team members work more efficiently

Ebook

How Automation Can Solve Finance Teams’ Biggest Challenges

Take a few pages out of WeWork’s playbook and learn how automation can solve some of the greatest challenges facing your finance team.

Download the ebook

The value of improved invoice processing

Accurate invoice processing determines overall control of the accounts payable process. It enables AP teams to make the best use of cash and available credit within an accounting period.

Accuracy and timeliness, in many instances, come from adopting a comprehensive, automated AP system that offers validation and tracking for accounts payable, accounts receivable, expense account data, etc. 

The gold standard is an automated AP system that handles daily transactions and produces the required management and financial reports for that accounting period, including the trial balance report.

9 Common pitfalls of multi-site AP processing

Businesses with several sites, functions, and divisions often create accounting process silos. Each site, function, and division has a separate bookkeeping system to record and account for its procurements and payments. This may extend to separate order approval, procurement, and accounts receivables processes. 

Individual procurers in each location may have the same preferred vendors for products and services as other procurers. However, if they order separately, it duplicates efforts and robs the company of leverage. 

Redundant and siloed ordering affects the business in several ways:

• Multiple invoices matching each order and delivery
• Maverick spend and budget waste
• Missed opportunities for bulk discounts
• Poorly negotiated terms and conditions
• More complex invoice processing
• Increased invoice exceptions and errors
• Potential for procurement fraud
• Higher overall spending and overhead
• Weakened cash position and credit access

Problems of interim trial balance reports

Beyond ineffective and decentralized purchasing, each site or function often prepares separate financial statements up to a predetermined level. For example, they may:

• Balance the accounts payable and receivable ledger accounts
• Produce separate (balanced or unbalanced) AP trial balance reports
• Have separate operating and P&L Accounts

Bookkeeping entries, account balances, and any supporting documentation go to the head office. They’re then summarized for the accounting period. After reconciliation, the AP teams use the balances to create an overall trial balance report before posting it to the general corporate ledger. Alternatively, the approved reporting system may require each site or silo to prepare basic bookkeeping figures to be aggregated at the corporate level.

A major and common problem for head office-based accounts payable processing teams is that any errors in the interim AP trial balance reports are difficult to locate once they extend to the corporate level. One silo’s accounts payable trial balance may appear accurate because its debits and credits balance out. An error within an account number may have gone unnoticed.

Alternatively, an error of commission in one liability account may be balanced by an error of omission in another. The net result is that the errors may remain invisible until a vendor’s invoice amount is underpaid, overpaid, or missed.

The immediate result of such mistakes is more research and corrections work for AP. This wastes time and creates inaccuracies in finalized financial reporting. Miscalculated payable liabilities in the general ledger are concerning since the executive team may base decisions on faulty reports.

The downstream effect of inaccuracies in any AP trial balance reports is payment delays for vendor invoices. A vendor that has accepted orders, shipped products or services to separate sites, and submitted accurate invoices should have a reasonable expectation of timely payment. Failure to pay because of internal AP errors may lead to delivery suspensions or renegotiation of credit agreements.

Ebook

How Automation Can Solve Finance Teams’ Biggest Challenges

Take a few pages out of WeWork’s playbook and learn how automation can solve some of the greatest challenges facing your finance team.

Download

"*" indicates required fields

First Name*

Last Name*

Company*

Email*

Phone

Phone

This field is for validation purposes and should be left unchanged.

A balanced trial balance may still not be accurate

Balanced AP trial balance reports are a prerequisite for producing accuracy across siloed departmental and corporate general ledgers. However, balanced trial balance reports may still have equalizing errors of omission or commission concerning debits and credits.

AP trial balances may also have errors of principle, such as if a clerk incorrectly posts a vendor’s invoice for services or materials to a capital acquisition account. This can result from something simple like a misunderstood product code or mistyped account number. 

Therefore, a trial “balance of balances” is not a guarantee of accuracy. As a result, it cannot be relied upon to prove there are no unbalanced journal entries or that the financial statements will be accurate.

How Order.co helps accounts payable trial balance reporting

Accurate and timely reporting is essential for businesses to achieve and maintain financial control and for the C-suite to make valid decisions. Improving preparation starts with making improvements in AP invoice processing. 

The goal is for AP processing to be simple and accurate. That helps ensure trial balance reports are accurate before you enter data into the general ledger and publish the balance sheet.

By implementing a procurement solution like Order.co, businesses automate and streamline many of the processes that lead to more accurate invoices and AP trial balances, such as:

• Avoiding the nine pitfalls common to multi-site procurement and processing
• Increasing visibility to improve capital efficiency
• Improving vendor relationships through timely, accurate payments
• Operating a transparent, automated system—from product sourcing to invoicing and payment

To learn more about improving your AP processing with Order.co, request a demo.

B2C business success brings its own headaches.

Here is the simple reason why — B2C businesses succeed by selling current and new products and services to existing customers, and then,  they sell to those customers more often. B2C businesses will also acquire new customers, and then repeat the whole process over again.
Having more customer orders means ordering more supplies from current and new vendors, and that is what causes headaches for many businesses. COVID-19 has made it worse. More people are working remotely, teams are introducing new monitoring and checking procedures, and flaws are coming to light. Managing the increased orders and deliveries leads to workload problems because much of it is not standardized and the work is done manually. Your team must then process everything through the accounting system.

The entire accounts payable (AP) process has been in place forever. It is often cumbersome, flawed, inefficient, and leads to dislocations in supplier relationships. In this article, we will discuss:

1. The accounts payable system, its shortcomings, and how to fix them.
2. How fixing problems is not just about making some improvements.
3. Specific and measurable benefits to changing the way AP accounting is done and how the AP department works.

Accounts Payable shortfalls

Staying on top of your accounts payable accounting system is essential. Non-standardized and inaccurate purchase order processing, inaccurate bookkeeping, and imperfect account balances all create problems for the accounts payable department and the C-suite (once the company's general ledger and balance sheet are produced), as well as for suppliers. Late, missed, or short payments caused by those inaccuracies can damage vendor relationships because payment terms are not met. It also generates inaccurate financial statements for the FD and CFO, which negatively affects cash flow and, usually, adds burdens to AP accounting team members' already heavy workload. This then impacts productive workflow and encourages more errors.

In the age of COVID-19, B2C business employees are already under stress from worry, staff absences, potential illness, home-schooling demands, family emotions, and so on. Those problems and performance shortfalls escalate.

When they are working in isolation or as part of a skeleton crew, errors can increase. This wastes time and money and strains vendor relationships.

AP accounting success

Managing AP accounting well has the opposite effect:

1. Vendor relationships improve.
2. Staff workload goes down.
3. Morale stays high.
4. Costs go down.
5. Liquidity improves.
6. You get ahead of competitors who are not on top of everything.
7. Your profits rise.

In B2C accounts payable accounting, the ordering process tends to operate differently across each outlet, studio, store, or restaurant. In addition, if all truth lies in the balance sheet, you sow the seeds in the accounts receivable and accounts payable accounting functions.

Ebook

The Hidden Risks Behind Your AP Balance Sheet (Some Will Surprise You)

If your company’s balance sheet is not portraying an accurate picture, you’re shooting in the dark. Download the ebook to learn how to avoid this lethal pitfall.

Download the ebook

The AP accounting cycle

Accounts payable is based on the expenditure and purchasing cycle. This, in turn, is part of the overall procurement to payment process (P2P). The steps include:

1. Customers place orders

These may be regular orders for in-stock items and services or included in regular delivery schedules. Consumer orders may be poorly explained (especially if done over the phone or by text) or may need to be corrected. Also, what could have been a bulk order often comes in parts. Servicing those orders requires that direct materials are available to meet known and expected customer demand. It also requires other items such as equipment, cleaning supplies, and office supplies.

2. You place orders with vendors

To meet display, production, customer use, or factoring demands, managers and other individuals in each outlet place purchase orders directly with vendors. Separate ordering systems develop, even if the vendor supplies other outlets Quite often, so do separate order- and delivery-monitoring systems. Vendors then deliver, often to separate sites or to one site for subsequent internal distribution to separate departments within the site.

3. Received deliveries trigger internal controls

Deliveries trigger internal controls, which result in delivery documentation receipts or vouchers. These are checked for accuracy against the original purchase order paperwork. The paperwork is then either passed for processing, or the vendor is contacted to check details or correct any errors.
Once delivery details are approved, vendor invoices are received and checked against delivery records. They are then passed to the AP accounting team for processing. Again, if discrepancies are noticed, then internal checks are made and the vendor is contacted to solve errors.

4. Documents receive approval and enter the system

After documents receive approval, AP accounting team members input invoices to the vendors' accounts as ready for payment. A single invoice for multiple deliveries, or situations in which items in a single delivery are allocated to different sites or functions, will then be analyzed and costs allocated accordingly to generate management accounts. In many B2C businesses, there are additional internal analyses and controls, all of which add to the pressure people feel.

5. Payments are scheduled and made

Unpaid invoices form part of current liabilities. So payment schedules must be prepared and approved. The purchase ledger balance includes trade payables and forms part of the liability account (which includes utilities, bank interest, etc.). Payments are then made according to the internal protocols and current liquidity.

How different B2C businesses handle AP accounting

Accounts payable accounting processes are detailed, complex, and time-consuming. Some businesses automate the entire cycle, while others process some of it manually and integrate those parts with automated financial accounting practices later in the cycle. Managing individual orders, monitoring each vendor's shipments and deliveries, handling paper invoices, and paying vendors by check is also how many B2C businesses operate now. It’s also how they see their future.

The inefficiencies systemic in accounts payable have grown because of COVID-19 lockdowns, social distancing, and basic human stress. There is a better way, and the pandemic can be the match that lights the fire of change.

Ebook

The Hidden Risks Behind Your AP Balance Sheet (Some Will Surprise You)

If your company’s balance sheet is not portraying an accurate picture, you’re shooting in the dark. Download the ebook to learn how to avoid this lethal pitfall.

Download the ebook

The fire of change for AP accounting

Successful businesses approach AP accounting as an integral part of the entire process, from ordering through to the paying cycle. Integrating and automating delivers real results. It begins with ordering via a centralized and controlled system. It then moves on to monitoring logistics, managing physical deliveries, and handling delivery and purchase records. Then, accounting for those purchases continues through to payment scheduling and to final payment.

This complete-cycle system generates a level of efficiency and accuracy that a traditional ordering and accounting system cannot. This comprehensive approach is, as we have said, called "Procurement-to-Pay" or P2P.

The result of introducing a full P2P system is that the time spent processing all those records goes down — and accuracy goes up. Costs go down, internal efficiencies rise, vendor relationships improve, and the net result is greater profitability. You also gain the real ability to increase your business's marketplace footprint without all the on-the-ground stress too many people are currently living under.

Customers may still place orders in their old, inefficient ways. But the time saved on P2P and AP accounting can improve the customer experience by introducing methods to raise their game. More time can go into assessing customer profitability so you can let the costly and unprofitable ones go. This enables systems to be put in place to coach the profitable customers to place their orders in ways that benefit them, your business, and your staff.

The practical benefits of fully automated and integrated AP accounting

It is easy to talk about increased efficiency and lower costs, but where do they show themselves? Consider these two different B2C examples, one in Japan and one in the United States. 
MINISO Is a retail business with 33 locations selling beauty supplies, household items, and fashion accessories. By introducing a consolidated vendor order and invoicing system, the process became streamlined, managers became more conscious of expenditure, and their hands-on involvement increased. Apart from obvious efficiencies, everyone saw better control, more staff involvement, and a feeling of empowerment. This boosted morale and created a real sense of camaraderie.

[solidcore] is a health and wellness business. It originally had 25 locations. By automating its AP accounting process, it then expanded to 50 locations. The company saved approximately 356 labor hours a month by not having to manage and reconcile separate purchase orders placed independently by studio managers operating their own accounts with common suppliers.

These two examples show that — by centralizing purchase orders and logistics management, and by automating accounts payable — real savings are there for the taking. It is much easier for individual staff members to contact a central hub online to place orders, check progress, and monitor processing using appropriate accounting software than for them all to do it separately and with no comprehensive standards to work to. Having all of that managed and controlled for them doesn't just relieve pressure. It also reduces the stresses associated with operating in lockdown isolation and eases the feeling of "it is all on my shoulders."

Delivering the solutions

Accounts payable accounting has always been bound up in complex inefficiencies. The way COVID-19 impacted businesses and team members made those inefficiencies worse. It was easier for many businesses to hunker down and hope.

There is an old adage in business, "Winners make it happen. Losers let it happen." Making AP accounting happen in ways that deliver worthwhile savings, greater efficiencies, greater accuracy, and better vendor relationships make financial planning easier and more certain. It also helps raise team member morale. Your marketplace footprint grows, and competitors are left behind.
In summary, when you link your AP accounting with Order.co's purchasing process — coupled with integrated payments and consolidated billing — you will:

1. Simplify your purchase order and AP accounting process.
2. Lose the traditional AP processes problems.
3. Shorten the whole accounts payable cycle.
4. Increase control over orders, supplies, the company's cash, payments, and reconciliation processes.
5. Lower operating costs and improve vendor relationships.
6. Boost team member morale.

Order.co's platform excels in maximizing the benefits of effective order processing and accounts payable systems. Request a free demo to learn more about how your business can remove AP processing problems and get the benefits. We look forward to working with you.