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 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. If your vendor invoices you more than once for the same services or items, QuickBooks preferences for Bills includes the option to be warned about duplicate bill numbers from the same vendor.
If you created your data file using the Express Start option, you might need to enable the features discussed in the earlier section “Preferences That Affect Accounts Payable.” If you are ready to work in your own data file, make sure you have created your new file as Chapter 1 instructed.
Accounts Payable Transactions
Many of the accounts payable transactions use QuickBooks items. If you are considering using the accounts payable process for the first time, be sure to review Chapter 4, which discusses the use of items and how to set them up properly.
If you choose to use purchase order transactions, you 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.
Should you use items even if you do not plan to use purchase order or item receipt transactions? I recommend that you do, especially if you follow the instructions in the nearby 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. This reduces or eliminates 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 do not provide the same information if the transaction is recorded using the Expenses tab.
For example, imagine that 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 Write Checks transaction), as Figure 7.11 shows.
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. Also review Table 8.1 on page 273 in Chapter 8, 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 a buyer issues 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 learn about the importance of using the accounts payable process in place of using the write check transaction type for recording business expenses. The QuickBooks Home page and Vendor Center, shown in Figures 7.1 and 7.5, 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 (see Figure 7.1), follow these steps:
- Access the Vendor Center.
- (Optional) Create a purchase order to the vendor.
- (Optional) Receive inventory with or without the final vendor bill.
- Enter bills against inventory (does not create an item receipt).
- 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 via the check transaction (from the menu bar, selecting Banking, Write Checks). 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 the following:
Associating the bill with the purchase order (or item receipt) to automatically calculate quantity and cost—When you enter the vendor’s name on a bill or write a check, QuickBooks prompts you with an open purchase order (or item receipt) dialog box (see Figure 7.12) and prefills the bill for you.
Figure 7.12 This warning displays 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—or, more likely, the user might inadvertently enter it twice. 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 vendor’s reference number appeared on a previous bill (see 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 transaction type.
- 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 are paying the bill within the vendor’s discount terms.
The purchasing controls and warnings in QuickBooks make using the accounts payable process a smart choice for your company. Additionally, your company benefits from having financial statements that can be viewed in both 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 nonposting, which, in accounting vernacular, means that 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.
Recording Vendor Bills
You are on your way to properly using accounts payable transactions to help track and report on your business expenses. You learn how to enter your vendor bills in this section.
The ribbon toolbar at the top of the transaction window includes access to commonly used transaction features that were hidden or hard to find in previous editions of QuickBooks. The ribbon toolbar on an Enter Bill transaction includes the following tabs:
Main—Use this tab to access the following:
- Browse or search saved vendor bills or credits using the arrows.
- Create, save, delete, copy, or memorize vendor bills. The Save option on the ribbon toolbar keeps the transaction open. You’ll still use Save & Close or Save & New at the bottom of the dialog box after you complete your transaction.
- Print the vendor bill. You might do this to provide details to a sister company that is paying the bill or when you need management’s approval before paying.
- Attach source documents. This is a free service and offers local document storage on your computer.
- Select PO or Enter Time to autofill the vendor bill with stored information from these transaction types.
- Clear Splits removes the line detail on the Expenses or Items tab but retains the vendor name, date, and other information on the header portion of the vendor bill.
- Recalculate updates the Amount Due field, which is helpful when you have additional line items.
- Pay Bills opens the Pay Bills dialog box with Filter By selected for the same vendor displayed in the transaction and the bill marked ready to be paid.
- Reports—From this tab on the ribbon toolbar, access a variety of reports specific to this type of transaction.
Recording Vendor Credits
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 that was not performed to your specifications? The next section shows 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 either apply the credit against that bill now or wait until the next time you need to pay the vendor.
If you want to view this unpaid bill on a report, select Reports, Vendors & Payables, Unpaid Bills Detail report from the menu bar. An unapplied credit then is listed in this report, as Figure 7.17 shows.
Figure 7.17 The Unpaid Bills Detail report makes it easy to see open vendor credits.
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 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 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 “Recording Vendor Credits” of this chapter.
If you are an accounting professional 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.
Taking Discounts on Vendor Bills
Your company might be able to save money by paying vendors within their allowed discount terms. Some vendors offer discounts 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.