Accounts Payable Cycle

What is Accounts Payable (AP) Cycle?

Accounts Payable cycle is also known as ‘Procure to Pay’ or ‘P2P‘cycle is a series of processes which involves the purchase and payments department of the company and carry all necessary activities from placing an order to suppliers, purchasing goods and making final payments to the suppliers.

Accounts Payable Cycle

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Every business has two major Business cyclesMajor Business CyclesThe business cycle represents the expansion and contraction of the economy that occurs due to ups and downs in the gross domestic product (GDP) of a country. It is experienced over the long term and goes parallel with the natural growth more  – revenue cycle and expenditure cycle.

Following are the Steps included in Accounts Payable Cycle

  1. Determination of Goods Required
  2. Procurement Process
  3. Search for Suppliers
  4. Request for Proposal
  5. Review Receiving Quotation
  6. Negotiation
  7. Purchase Order
  8. The Supplier’s Confirmation
  9. Suppliers’ Duty
  10. On Successful Delivery of Goods
  11. Invoice Entry
  12. Payment

Let us discuss these in detail –

Steps Included in Accounts Payable Cycle

Accounts Payable cycle are the series of different process in the company involving the different activities required for the purchase of the product right from placing the order for the goods to the suppliers, then purchasing and getting delivery of the goods and finally making the final due payment to the supplier against the same.

The following are steps included in the procure to pay cycle:

#1 – Determination of Goods Required

The purchases are made based on the stocks required by the production department of the company. The production manager identifies the needed supplies and informs the purchasing department.

#2 – Purchase Department starts the Procurement Process

After getting the approval of supplies requests from production, the purchasing department will look if some similar orders have already been placed; if not, then fresh documents of purchase orders are generated.

#3 – Search for Suppliers

Finding suppliers is a tricky job that includes various factors like locality, ease of transport, credit policies, goodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase more of supplier and its products, past connections with the company, and many more. However, the company prefers transactions with it’s tried and tested suppliers. In other cases, potential suppliers are selected locally, nationally or internationally using an online business to business portals (like, referrals, etc

#4- Request for Proposal

After selecting a few potential suppliers, a formal document is delivered in order to receive quotations of the items. The document is referred to as a request for proposal (RFP). The supplier sends a proposal, including product rates and qualities, and asks the company to do business with them.

#5 – Review Receiving Quotation

Company reviews the quotations send by different suppliers and filters the suppliers who can fulfill the company’s requirements. The company informs the selected suppliers about its interest in making purchase deals.

#6 – Company begins the Negotiation Process

Negotiation is a hectic and sometimes time-consuming process where buyer requests seller to lower its rates, offer liberal credit policy and other basic negotiation terms like discounts, quality of products, freight charges, delivery, and insurance terms. The negotiation process performs the filtering, and the company has identified the best suppliers.

#7 – Purchase Order

The company on approving the desired supplier awards him the order by sending the official purchase order document. It confirms the supplier about the company’s requirements and the deadline for the delivery of the products or services.

#8 – The Supplier’s Confirmation

The agreement initiates when a supplier agrees to sell its products at the requested terms and conditions. A confirmation of acceptance has to be sent by the supplier in written through post or email.

# 9 – Suppliers’ Duty

It’s the duty of the supplier to get the goods ready and shipped following the deadlines strictly and keep the company informed about the order progress. Notification must be sent when goods are ready to be shipped and a shipment notice, including valid documents specifying a description of goods, including weight or units, delivery date, location, etc.

#10 – Inspection of Delivered Goods

The process of inspection begins, which includes both quality and quantity checks. The purchase department checks if delivered goods are according to the purchase order.

#11 – Invoice Entry

On successful inspection, if everything finds fit, the purchasing department sends the approval to the accounts payable department to begin the payments process. The accounts payable department thus makes a record of the invoice, which contains all the specifications about the payment like final date and/ or a final date with discount, amount of reimbursement, and other official details.

#12 – Payment

After every necessary check, the accounts payable department starts making payments to the supplier partially or fully as per company norms. There are various ways to make payments to the suppliers like:

Relevant Documents Involved in AP Cycle

The following are important documents included in procure to pay cycle:

#1 – Purchase Order

The purchasing department of the company generates an order of the required goods and sends it to the vendor. The order details the vendor about the items along with its quantities. It also specifies a date on which the goods are required to be delivered.

#2 – Receiving Report

After the goods are delivered, the management inspects the shipment and checks the quality, quantity, and other essential aspects. After a full inspection, it creates a detailed report called receiving the report.

#3 – Vendor Invoice

The document is the legal contract in which the vendor details the goods, the rate per unit, and the total amount along with the applicable taxable amount. It also specifies the credit policy and the final date for payment.

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