A company is required to develop various policies and procedures for different business processes. One of the most important business processes is Accounts Payable. Accounts payable can comprise of three important components: vendor payable, employee expense reimbursement and accrual. Vendor payable indicates the amount of money to be paid to the creditors (for procurement of raw material, office supplies, etc.).

Employee expense reimbursement indicates the amount of money to be reimbursed to the employees for various business expenses like money spent by the employee on an official tour. It is important to note that personal expenses incurred by the employee are not reimbursed under this category. Accrual indicates the amount of money that has become due for payment, but has not been paid by the company.

While the proportion of employee expense reimbursement and accrual may not be very high in a company’s account payable, vendor payable is generally the biggest component of accounts payable and is commonly found in an organization’s balance sheet. It is liability on the part of the company that is required to be paid in the near future.

Accounts payable process is highly susceptible to fraud as it involves making payments to vendors. Therefore, it is very important to prescribe an appropriate policy and relevant procedures for handling accounts payable effectively.

Important Components of Accounts Payable Policy Procedures

Invoices

One of the most important part of accounts payable process is receipt of invoices from the vendor. It is important to define a policy whereby it is mentioned that all items (required for the organization) should be purchased from authorized vendors only. Further, a procedure should be defined for verification of all the invoices by authorized personnel before payment is released in favor of any vendor. It is quite possible that duplicate payments may be made to the vendor in the absence of proper verification and authentication procedures.

Payments

As a part of accounts payable policy, cash payments to vendors should be strictly prohibited. Payments can be made through checks or through electronic fund transfers. This can reduce the possibility of fraudulent payments. All payments should be made after obtaining approval of authorized personnel.

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In case of small scale organizations, all payments are generally authorized by the business owner. In case of large scale organizations, a payment approval matrix can be established. Further, all payments should be recorded appropriately in the books of accounts to ensure that accounts payable liability is reported at correct value in the balance sheet.

Reconciliation

It is very important to reconcile all the payments made in a day with the bank statement (as and when received). This is important to ensure all the payments have been debited from the company’s bank account. Further, it can help in the verification of bank balance of the company.

Segregation of Duties

As a part of the policy statement, it is important to ensure that there is proper segregation of duties within the accounts payable department. Segregation of duties is an internal control which ensures that multiple (critical) functions are not performed by a single employee within the organization. Therefore, the employee responsible for the verification of invoices should not be given the responsibility to release payments.

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