The Accounts Payable Process
QuickBooks includes a flexible payable process. Your company can choose to use the purchase order and receive item transactions for controlling and monitoring costs and delivery, or you can skip these steps and simply create a bill to be paid later.
An important reason for using a vendor bill to record your business expenses is the ability to track the vendor’s bill reference number. In the event your vendor invoices you more than once for the same services or items, QuickBooks will optionally warn you when you enter a reference number that was previously recorded.
If you created your data file using the Express Start option you might need to enable the features as discussed in the earlier section “Preferences That Affect Accounts Payable” of this chapter. If you are ready to work in your own data file, make sure you have created your new file as discussed in Chapter 1.
Accounts Payable Forms
Many of the accounts payable forms use QuickBooks items. If you are considering using the accounts payable process for the first time, be sure to review Chapter 4, “Understanding QuickBooks Lists,” which discusses the use of items and how to set them up properly.
If you choose to use the purchase order transaction, you will need to create items. Items are a list of the products or services you sell to customers or purchase from vendors. The primary purpose of items is to perform the accounting behind the scenes and to automate the data entry process by prefilling descriptions, costs, and sales price on purchase and sales transactions.
Figure 7.10. You can use the same item with both customers and vendor transactions.
Should you use items even if you do not plan on using the QuickBooks purchase order or item receipt transactions? I recommend that you do, especially if you follow the instructions in the preceding tip. A powerful feature of items is that each time the item is purchased or sold, QuickBooks records the amount to the specific account(s) defined in the Add New or Edit Item dialog box, reducing or eliminating potential errors created from recording the transaction to the wrong account when using the Expense tab of a purchase transaction.
How can items help you track your customer’s profitability? Many of the QuickBooks reports that provide profitability information are based on transactions recorded using items on the Items tab and will not provide the same information if the transaction is recorded using the Expenses tab.
For example, a home builder creates a budget for the project (using an estimate transaction) and wants to track actual versus budgeted expense. To take advantage of the many customer and job profitability reports, you must enter your expenses using the Items tab on an accounts payable bill (and use the same process for the check transaction), as shown in Figure 7.11.
Figure 7.11. Use the Items tab to record expenses you want to track in customer or job profitability reports.
Table 7.1 lists the transaction types available in accounts payable and the purpose each type serves. You will also want to review Table 8.1 in Chapter 8, “Managing Vendors,” which outlines the accounting that goes on behind the scenes with these same transactions.
Table 7.1. Accounts Payable Transactions
Accounts Payable Transaction Name
Primary Purpose of Transaction
Document issued by a buyer to a seller indicating the products or services, quantity, and amounts the buyer has agreed to pay.
Item Receipt (Receiving inventory, non-inventory, or other item recorded on a purchase order)
Records receipt of inventory, non-inventory items, or other item types when the goods arrive before the vendor’s final bill.
Records an increase to accounts payable and the associated expense.
Vendor Credit Memo
Records a decrease of what is owed to a vendor.
Bill Payment Check
Pays the vendor bill and decreases accounts payable and cash account balances.
Accounts Payable Workflow
In this section you will learn about the importance of using the accounts payable process instead of writing a check for your business expenses. The QuickBooks Home page and Vendor Center, as shown in Figures 7.1 and 7.4, respectively, make managing all your purchasing activities easy.
Your Home page workflow might vary, depending on the version of QuickBooks you are using and the preferences you have enabled.
To perform typical vendor-related activities from the QuickBooks Home page, as shown in Figure 7.1, follow these steps:
- Access the Vendor Center.
- Create a purchase order to the vendor (optional).
- Receive inventory (optional).
- Optionally, enter bills against inventory.
- Enter a bill to the vendor.
- Pay the bill (typically within the agreed-upon payment terms for that vendor; for example, 30 days from the bill date).
Some companies choose not to use accounts payable transactions, but instead pay their vendors with a check (select Banking, Write Checks from the menu bar). Often, this choice is made because the process of paying a vendor with a check is quick and easy and takes fewer steps than creating and paying a vendor bill.
However, by choosing not to use accounts payable transactions, you ignore several important controls for managing the purchases your company makes. These purchasing controls include:
- Associating the bill with the purchase order (or item receipt) to automatically calculate quantity and cost—As soon as you enter the vendor’s name on a bill, QuickBooks prompts you with an open purchase order (or item receipt) dialog box, as shown in Figure 7.12, and prefills the bill for you.
Figure 7.12. Warning provided when you enter a bill for a vendor that has an open purchase order.
- Receiving a warning when entering a vendor invoice number twice—It can happen: A vendor sends you a bill more than once and you pay it more than once. However, when you use a vendor bill (versus the Write Checks transaction) and you enter the vendor’s invoice number in the Ref No. field, QuickBooks warns you if the vendors reference number was used on a previous bill, as shown in Figure 7.13.
Figure 7.13. QuickBooks provides a warning message when you enter a bill with the same reference (vendor invoice) number.
- Not recognizing costs in the month they were incurred—When you opt to use the Write Checks transaction instead of a vendor bill, QuickBooks uses the date of the check as the date the expense is recorded (recognized). How often do you pay the vendor’s bill the same day or month you receive it? You might be overstating or understating the expenses incurred in a specific month if you use the check instead of the bill form.
- Taking advantage of discounts offered by your vendor—Only if you use vendor bills can you set a preference to have QuickBooks automatically calculate and record the discount if you’re paying the bill within the vendors discount terms.
The purchasing controls and warnings provided in QuickBooks make using the accounts payable process a smart choice for your company. Additionally, your company will benefit from having financial statements that can be viewed in cash and accrual basis.
Entering a Purchase Order
Your business might choose to record purchase orders to track the expected product or service cost. Purchase orders are non-posting, which in accounting vernacular means when you record a purchase order you are not recording an expense or liability. Instead, a purchase order serves as a reminder that you expect to receive a bill from the vendor at a later date.
- To learn more about working with purchase orders, see “Creating the Purchase Order,” p. 142.
Recording Vendor Bills
You are on your way to properly using accounts payable forms to help track and report on your business expenses. Learn how to enter your vendor bills in this section.
Other buttons on the Enter Bills dialog box include:
- Clear Splits—Useful when you want to condense multiple account rows into a single account row.
- Recalculate—The Recalculate button updates the Amount Due field, which is helpful when you have added additional line items.
- Save & Close or Save & New—Choose Save & Close if you don’t need to add another bill, or Save & New to display a blank Enter Bills transaction.
- Revert—Click this button when you want to undo changes to a previously saved vendor bill.
Creating a Vendor Credit
Now that you are recording your business expenses with vendor bills, what about returning a product to the vendor or receiving a credit for a service not preformed to your specifications? The next section will show you how easy it is to create a vendor credit.
This vendor credit is currently unapplied and available to be applied when you record a bill payment. If you know that a vendor has an unpaid bill pending, you can apply the credit against that bill now, or wait until the next time you need to pay the vendor.
Paying Vendor Bills
One of the benefits of entering vendor bills is that you can record the expense during the month you incur it, but pay the balance owed at a later date.
If you are ready to pay your bills, make sure you have a vendor bill or some record of the expense being incurred. Develop a process at your business for accurately reviewing your unpaid bills.
You have now learned how to complete basic accounts payable tasks including using bills to record your expenses and preparing the payment for the vendor. In the next sections, you will learn how to work with vendor discounts and credits.
Applying Vendor Credits
Your vendor might offer discounts for timely payment or issue a credit for products or services that did not meet your expectations.
Continue your QuickBooks practice by applying the vendor credit created in an earlier practice section of this chapter.
If you are an accounting professional and using QuickBooks Accountant or QuickBooks Enterprise Accountant you might want to use the Client Data Review feature. From one convenient window, you can assign the vendor unapplied credit memo to the open accounts payable bill, replacing the previous steps numbered 3–8.
- To learn more about time savings features for accounting professionals, see “Client Data Review,” p. 601.
Taking Discounts on Vendor Bills
Your company might be able to save money by paying your vendors within their allowed discount terms. Discounts are offered by some vendors to encourage quick payment of their invoices.
If you are going to assign discounts to your vendor bills, record your bills at the “gross” amount, or total amount before any discount. Then, over time you can watch the amount you have saved grow!