The account payable of a business refers to any credit it has taken from suppliers for any goods purchased or services obtained from them. The account payable is a liability for a business that it has to pay in a future point in time. As with any other system in a business, the account payable control system is prone to different risks.
To mitigate the risks associated with account payable system of a business, the business has to introduce different types of controls. The controls are put in place to prevent any possible risks and control any risks that may still occur. While these controls cannot stop the risks completely, they can reduce the possibility of their occurrence to a minimum level.
The account payable of a business incorporates two major areas of a business, purchases and payments. There needs to be proper controls in place to ensure there are no misstatements in the account payable of a business either due to fraud or error presented in the financial statements. Furthermore, the account payable system of a business dictates its relationships with its suppliers. Proper account payable control means the business will have good relationships with its suppliers.
The type of system a business has in place to manage its account payable system dictates the type of controls that are necessary to implement. This means that these controls depend on whether a business is using a paper-based, a basic computerized or modified or advanced computerized account payable system.
Paper-based vs Computerized Accounting
Paper-based accounting is way of manually recording and maintaining transactions. This is done by keeping different books, also known as ledgers, and all the data is manually recorded and maintained in those ledgers. Paper-based accounting is more time-consuming and error prone. Once an error occurs in paper-based accounting systems, they are also difficult to track and rectify.
Computerized accounting system, on the other hand, is much faster and accurate as compared to paper-based accounting system. This system decreases the manual work required and automates most of the tasks. It is also easier to track and rectify and errors in the computerized accounting systems. There are two types of computerized accounting systems packages that a business can acquire for its use, off-the-shelf packages or bespoke packages.
Off-the-shelf vs Bespoke Packages
Off-the-shelf packages are available for use to everyone. These might be packages like QuickBooks or Tally that is available to all businesses. These are generic software that any business can adapt and use. On the other hand, bespoke packages are custom-made packages that a business can develop for its own use. These packages have the advantage of giving the business custom features that an off-the-shelf package might not provide but at a higher cost.
The choice on whether to choose an off-the-shelf package or bespoke package lies with the business. If an off-the-shelf package can meet the business’ needs for accounting, then the business doesn’t need bespoke packages as they are more expensive. However, since off-the-shelf package are generic and may not meet all the needs of a business, it may be difficult for businesses to use these in the long run.
Control System For Paper-Based Account Payable System
The following controls should be implemented in a paper-based account payable system to ensure the effectiveness of the account payable system:
Proper Authorization Of Payments
In a paper-based account payable system, proper authorization of payments must be ensured. If payments aren’t properly authorized, the chances of fraud or error increase significantly. Personnel in charge of authorizing payments must check the supporting evidence for the payment and ensure the payee name and amount of payment are correct. This will ensure that payments are made only to suppliers with balances to be paid.
Sorting Payables By Due Date
In a paper-based account payable system, all invoices payable should be sorted by the due date of the payment. This will ensure all invoices are paid on time and the relationship of the business with its suppliers is not compromised. By doing so, businesses can also identify any potential early payment discounts that may be feasible for the business.
Proper Invoice Checks
When an invoice is received, businesses must check the source of the invoices. Some times businesses may receive unrelated invoices or fraudulent invoices. Therefore, businesses must ensure the invoices relate to purchases actually made by the business. Furthermore, the business must compare the invoice with purchase orders to ensure the correct quantities and prices have been charged. This way, the business can also effectively filter any duplicate invoices.
Sequential Numbering Of Purchase Orders
Businesses can also use sequential number on their purchase orders to enable proper tracking of purchases. A business can identify any fraud or error by identifying any missing purchase orders or non-sequential purchase orders.
In a paper-based account payable system, arithmetical errors are bound to exist. Businesses must ensure that any invoices and payments amounts are cast properly. This can be done by properly casting the invoices or payments and verifying the calculations twice.
In a paper-based account payable system, physical controls of documents must also be ensured. Purchase orders and cheque books must be properly locked up to ensure any unauthorized is prevented. This will ensure any attempts of fraud are reduced to a minimum.
Control System For Basic Computerized Account Payable System
A computerized account payable system has many advantages over a paper-based system. However, controls must still be established to ensure the effectiveness of the system. Some of the paper-based account payable system control procedures also apply to basic computerized account payable systems. Further controls for basic computerized account payable system are as follows:
Payable Age Analysis
A basic computerized account payable system can generate payable age analysis reports. This report can be used to find any invoices that need to be paid soon. This means that the business doesn’t have to sort payables by due date as is the case with manual account payable system. In a computerized system, this can be done easily without need for manual sorting of the invoices. Furthermore, the age payable analysis can be used to find any potential cash discount opportunities to avail.
Some times the business may not receive invoices on time for purchases made or may not record payments for invoices on time. It is, therefore, necessary that businesses check their account balances with the supplier’s balance to ensure the balances are up-to-date. Any discrepancies should be identified by the business and either the supplier or the business make adjustments to their balances.
Once a computerized account payable system is introduced, businesses must also ensure that only authorized personnel have access to the system. Additionally, these systems must be properly protected by passwords to restrict access. Only the personnel in the payables department be allowed to make changes in the payable balances.
Control System For Modified Or Advanced Computerized Account Payable System
In a modified or advanced computerized system, not as many controls may be required as with paper-based and basic computerized systems. Some controls from basic computerized account payable system may still apply. Further controls for advanced computerized systems may include:
In an advanced account payable system, any payment made is directly matched to the related invoices. Furthermore, invoices received are automatically matched with purchase orders. This can be used to eliminate many repetitive tasks and automate the reconciliation process.
In a modified computerized account payable system, payments can be automatically made for the invoices that are due. These payments are made automatically to the supplier and can reduce or eliminate the need for authorizations.
Generate Audit Trails
An advanced computerized system can automatically generate audit trails to help track any discrepancies in the system. In this system everything is automatically recorded and up-to-date, thus, any error can be readily identified and corrected.
The payable account system of a business relates to the purchases and payments for those purchases for the business. An effective control over the account payable system can help businesses in paying any dues on time and maintaining a good relationship with its suppliers. The type of controls that need to be implemented depends on whether the business is using a paper-based, basic computerized or advanced computerized account payable system.