Bookkeeping For Dummies
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Eventually, you have to pay for both the inventory and the supplies you purchase for your business. In most cases, the bills are posted to the Accounts Payable account when they arrive, and they’re paid when due.

A large chunk of the cash paid out of your Cash account is in the form of the checks sent out to pay bills due in Accounts Payable, so you need to have careful controls over the five key functions of Accounts Payable:

  • Entering the bills to be paid into the accounting system

  • Preparing checks to pay the bills

  • Signing checks to pay the bills

  • Sending out payment checks to vendors

  • Reconciling the checking account

In your business, it’s likely that the person who enters the bills to be paid into the system also prepares the payment checks, but the other tasks should be done by someone else. You should never allow the person who prepares the check to review the bills to be paid and sign the checks, unless of course that person’s you, the business owner.

The person signing the checks should carefully review what’s being paid, verify that proper management approvals for the payment are shown on that paperwork, and confirm that the amount being paid is accurate. You should also separate responsibilities to be sure that the person who reconciles your checking account isn’t preparing or signing checks.

Properly managing Accounts Payable can save your company a lot of money by avoiding late fees or interest and by taking advantage of discounts offered for paying early. If you’re using a computerized accounting system, the bill due date and any discount information should be entered at the time you receive the inventory or supplies (refer to the figure for how you record this information).


If you’re working with a paper system rather than a computerized accounting system, you need to set up some way to be sure you don’t miss bill due dates. Many companies use two accordion files: one that’s set up by the month, and the other that’s set up by the day.

When a bill first comes in, it’s put into the first accordion file according to the month in which it’s due. On the first day of that month, the Accounts Payable clerk pulls all the bills due that month and puts them in the daily accordion file based on the date the bill is due. Payment checks are then mailed in time to arrive in the vendor’s office by the due date.

In some cases, companies offer a discount if their bills are paid early. Suppose the terms of the discount for the vendor is “2% 10 Net 30.” That means that if the bill is paid in 10 days, the company can take a 2 percent discount; otherwise, the amount due must be paid in full in 30 days. In addition, many companies state that interest or late fees will be charged if a bill isn’t paid in 30 days.

For example, if the bill were for $1,000 and the company pays the bill in ten days, it can take a 2 percent discount, which means they would pay $20 less, or $980. That may not seem like much, but if your company buys $100,000 of inventory and supplies in a month and each vendor offers a similar discount, the company can save $2,000. Over the course of a year, discounts on purchases can save your business a significant amount of money and improve a business’s profits.

About This Article

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About the book author:

Lita Epstein, MBA, designs and teaches online courses in investing, finance, and taxes. She is the author of Trading For Dummies and Bookkeeping Workbook For Dummies.

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