Why You Should Run a Proper Accounts Payable Process

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Bookkeeping software often comes with two options for entering expenses – Accounts Payable and Spend Money.

While the Spend Money method can be quick and easy, there are reasons you should not use it all the time.

Let’s take a look at the differences between the two functions, and when you should use them!

 

The two methods for recording expenses

Accounts Payable (AP) keeps a record of expenses you’ve incurred, but not yet paid. This means the AP module is where you would enter bills from suppliers for goods and services you’ve received on credit. Doing so allows you to check at any point what money you owe to which suppliers and by when.

The Spend Money function allows you to enter money you’ve just spent. When you enter an expense here, it is recorded immediately against your bank account or credit card in the system.

So, a main difference between the two is that one is based in the future and the other more in the past. But there’s more to it than that.

Advantages of AP

As well as keeping track of what you owe, a proper AP process offers several advantages:

  • Better cash flow management – by having a complete record of what you owe your suppliers in one place, you are in a better position to create more accurate cash flow forecasts.
  • Historical records – the AP module keeps a past record of all payments made for each supplier, which makes reconciling easier and is helpful in case of disputes.
  • Ability to make bulk payments – rather than paying each bill separately you can ‘batch’ them and create a payment file to send through to your internet banking. So, you end up recording the one payment rather than a separate for each bill – which could be very time-consuming and messy. This saves time and helps ensure better accuracy.

Advantages of Spend Money

Of course, not every expense comes with a bill attached. There are always those one-offs and incidental costs – such as for petrol, office milk, shop purchases, donations and so on.

Spend Money is very useful for these types of expenses that get paid immediately and that don’t fit within the AP mould.

When to use which function

AP should definitely be used for recording the costs of goods or services you are planning to pay later. This includes utilities, such as electricity, gas and water.

Spend Money is great for day-to-day things you pay for as you go. It can also be used for recording bank costs as they pop up, such as account fees and interest, and for recording transfers between bank accounts.

Very small or new businesses with few expenses may also choose to use Spend Money to record payments. However, as the business grows it will likely at some stage need to shift to using AP.

Either way, it’s very important that payments are entered very accurately to avoid messing up your accounts.

Partnering with a professional bookkeeping service can also help take the guesswork out of entering expenses and payments. Contact our team to find out how working with us could benefit your business.

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