Guide to Setting up an Accounts Payable System

Consider a software or Web-based system

If you run a one- or two-person shop, a manual system may be sufficient. However, A/P software and Web-based programs make it easier to track, review and pay accounts payable. A major benefit of these programs is the reduction in human error.

I recommend: A/P is a component of numerous popular accounting software programs, such as Peachtree, QuickBooks BIll Pay Service and MYOB. If you prefer a Web-based program, look into ExpenseWatch.com.

Use purchase orders

Purchase orders are the first step in an A/P system. When you decide to buy equipment or supplies, draft a purchase order authorizing the purchase and include the prices to be paid.

I recommend: Create purchase orders using your accounting software, customize a purchase order template included in SmartDraw software or create purchase orders online at LawDepot.com.

Use a cash disbursement journal

Record all purchases, along with all checks written and other payments made, in a cash disbursement journal, sometimes called a checks disbursement journal. Record purchases in one column and payments in a separate column. Be sure to balance this journal with your general ledger — where you record both accounts receivable and accounts payable — each month.

I recommend: If you're taking a manual approach to A/P, order a disbursement journal from Deluxe.com or download one in Microsoft Word format from AllBusiness.com.

Use accounts payable ledgers

Create a separate A/P ledger for each supplier and record all purchases so you can easily determine how much you owe a particular supplier. Balance the totals in your A/P ledgers with your general ledger on a monthly basis.

I recommend: For manual entries, find ledger books at OfficeWorld.com. If you're using software or a Web-based program, the program will help you create the various ledgers for each supplier.

Prevent overpayments and fraud

Implement controls to reduce the chances of overpayments or mistaken payments. Match your suppliers' invoices to your purchase orders to verify amounts due. Avoid duplicate payments by faithfully tracking cash disbursements. To reduce the potential for employee theft, separate duties — have one person write checks and another person sign them. Insist on receiving regular reports of balances and take the time to review them.

I recommend: Generate detailed and targeted reports, such as spending by vendor or budgeted expenditures vs. actual expenditures, with your software or Web-based accounting program.

Maximize your accounts payable

Once you have your system in place, take steps to get the most out of it and continually revisit your processes to refine and streamline them.

I recommend: As a member of The Accounts Payable Network, you can access tips and use online calculators, such as days payable outstanding and payment float calculators, to determine the best management of your accounts payable.