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What is an Accounts Payable Trial Balance and How Can it Improve Your AP Process

TAGS: accounts payable, accounts payable balance sheet, AP ledger
AP trial balance

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Business success demands effective decision-making, on-time reporting, and accurate data entry. Poor invoice processing is often a primary reason for errors entering the accounting system. People may not discover the resulting inaccuracies until they prepare the accounts payable trial balance. That then leads to late reporting and delayed decisions. If no one discovers the errors, executives will make flawed decisions.

 

Accurate processing positively impacts working capital which, in turn, affects operational control and future planning. To demonstrate how your business can ensure an accurate trial balance and improved processing (so you can reap the rewards of control and planning), we will discuss:

 

  • The main points to consider with regard to AP invoice processing and AP trial balance preparation
  • The value embedded within improved invoice processing
  • The nine common causes of inefficient, multi-site processing that result in trial balance errors
  • How accounts payable trial balance errors impact your vendors
  • The solution for first-time-right trial balances and how Negotiatus helps you deliver it

 

Trial Balance and Invoice Processing: The Main Points to Consider

 

C-suite execs, in a nutshell, focus on business success by ensuring all external and internal actions constantly deliver the intended results. Furthermore, the business must deliver those results efficiently and effectively.

 

To achieve that, every function and every action within it must be done as accurately as possible. That requirement places a massive responsibility on every aspect of corporate finance, particularly the AP process. Accounts payable is only part of the overall accounts structure, of course, and effective invoice processing is only a sub-part of that, but that is where we will focus.

 

When your accounts payable trial balance is accurate, fully inclusive, and timely, your invoice processing will improve. With improved invoice processing, accuracy and transparency become the norm across the entire accounts payable processing system. Together, they enable greater accuracy to support C-suite decision-making.

 

Some simple results based on that degree of accuracy include:

 

  • Operations can maximize working capital.
  • Companies can allocate credit in greater amounts to fund future business success rather than merely fund current operations.
  • Vendor relationships will improve.
  • Accounting team members can spend their time more effectively.

 

The Value of Improved Invoice Processing

 

As we have said in a previous article, if cash is king, then credit is the powerhouse. Overall control and making the best use of cash and your available credit balance within any accounting period rely heavily on accurate invoice processing within the overall accounts payable process. Accuracy and timeliness, in many instances, come from adopting a comprehensive, automated AP system and may begin with procurement protocols or just with the actual order placement. What matters is that the automated AP system will handle everything on a daily basis and then produce the required management and financial reports for that accounting period. These improvements enable accurate, planned, and strategic decision-making. A review of trial balance reporting links to improved invoice processing.

 

What is an Accounts Payable Trial Balance?

 

The accounts payable trial balance enables people to post payable liabilities to the general ledger. Accurate and comprehensive inclusion of those payable liabilities (like unpaid and partially paid invoices and other agreed-upon short-term liabilities) helps the business to reconcile initial journal entries, bookkeeping records, and sub-ledger balances with bank statements and other documents. Ultimately, the amounts are totaled and posted to the general ledger. They eventually appear as current liabilities in the balance sheet.

 

The 9 Common Pitfalls of Multi-Site AP Processing

 

Businesses that operate over several sites, different functions, and multiple divisions often maintain accounting process silos. In these cases, each site, function, and division has its own bookkeeping system to record and account for its individual procurements and payments. When each one maintains its own accounts payable process, it will probably also maintain its own order approval, procurement, and receivables processes. Individual procurers in each location may have the same preferred vendors for products and services as other procurers. The business then places multiple separate orders with the same vendor. This results in:

 

  1. Duplicated ordering
  2. Increased paperwork
  3. Multiple invoices to match each order and delivery
  4. An increased incidence of rogue purchases
  5. Missed opportunities for bulk discounts
  6. Missed opportunities for negotiating ideal terms of service
  7. More work and more complex invoice processing
  8. A greater incidence of error and potential fraud
  9. Greater spend, resulting in a weak current liability status

When each one maintains its own accounts payable process, it will probably also maintain its own order approval, procurement, and receivables processes.

 

Problems of Interim Trial Balance Reports

 

Each site or function will often also prepare its own financial statements up to a predetermined level. For example, they may:

 

  • Balance the accounts payable and receivable ledger accounts.
  • Produce their own balanced or unbalanced AP trial balance report.
  • Have their own Operating and P and L Accounts.

Bookkeeping entries, account balances, etc., go to the head office. There, they’re summarized for the accounting period. After reconciliation, the final figures are used to create an overall trial balance report before being posted to the corporate general ledger. Of course, the approved reporting system may be that each site or silo merely prepares basic bookkeeping figures to be brought together at the corporate level.

 

A major and common problem for head office-based accounts payable processing teams, where a site- or silo-based accounting system operates, is that any errors in the interim AP trial balance reports are difficult to locate once they are passed up to the corporate level. One silo’s accounts payable trial balance may be accurate in that its debits and credits balance out arithmetically. Still, errors within an account number can go unnoticed. Alternatively, an error of commission in one liability account may be balanced by an error of omission in another. The net result is that the errors may remain invisible until a vendor’s invoices become underpaid, overpaid, or not paid at all.

 

Before getting to that unfortunate point, take action. The immediate result of such mistakes is that, once detected, the errors must be researched, discovered, and corrected. This wastes time and may delay the publication of accurate financial statements. Miscalculated payable liability in the general ledger is dangerous if the errors are large enough and  C-suite executives use them for decision-making.

 

Trial Balance Errors Also Impact Vendors

 

The downstream effect of inaccuracies in any of the AP trial balance reports may result in payment delays of vendor invoices. The delays may be simply the result of bookkeeping errors within a multi-faceted AP processing system. But vendors won’t excuse delays in finalizing accounts caused by those internal miscalculations. That vendor may have accepted orders, shipped products or services to separate sites, submitted accurate invoices. Therefore, they should have a reasonable expectation of timely payment in full and in accordance with pre-agreed terms of trade. Failure to pay because of internal AP errors may then lead to delivery suspensions or renegotiation of credit agreements.

 

A Balanced Trial Balance May Still Not Be Accurate

 

Balanced AP trial balance reports are a prerequisite for producing siloed and corporate general ledgers and other financial statements. Balanced trial balance reports may still have equalizing errors of omission or commission concerning debits and credits. They may also have errors of principle, such as if someone posts a vendor’s invoice for services or materials to a capital acquisition account. This can happen for no other reason than a member of the AP accounts team misunderstood a product code or mistyped an account number. A trial balance of balances is, therefore, not a guarantee of accuracy. As a result, it cannot be relied upon to prove there are no unbalanced journal entries or that the financial statements will be accurate.

 

With so many accounting teams working in isolation because of COVID-19, such errors are likely to increase. Attempts to conceal errors to avoid additional effort and time at the local level may also increase. The result is that the head office AP processing team will carry an even greater burden.

 

Finding the Solution

 

The goal is for AP processing to be simple and accurate. That helps ensure that trial balance reports are also accurate before (i) data are entered into the general ledger and (ii) publication of the balance sheet. Simplicity, accuracy, and comprehensiveness in invoice processing all contribute to accuracy, transparency, and timeliness in first-time-right account balances and trial balance reports.

 

That goal drives system improvements. It demands a system that begins at the first action. That is usually when someone seeks authorization to place an order for approved items with either an existing or a new supplier. When all standards are known and easily met and when delivery paperwork is automatically linked to the order, followed by supply chain monitoring and eventual vendor invoice approval, you reduce complexity and increase accuracy and visibility. You also save time and money when you streamline the entire AP process.

 

The Bottom Line for Accounts Payable Trial Balance Reporting and Improved Invoice Processing

 

Preparing accounts payable trial balance reports is a basic part of financial accounting. Accurate and timely reporting is essential if businesses are to achieve and maintain financial control — and for the C-suite to make valid decisions. Improving preparation automatically demands improvements in AP invoice processing. It results in:

 

  • Avoiding the nine pitfalls common to multi-site procurement and processing
  • Maximizing working capital
  • Improving vendor relationships
  • Operating a simple, streamlined, integrated, accurate, transparent, and automated system, from order procurement to invoice payment

 

If you would like to arrange a free demo showing you how to achieve all this and to discuss our system with one of our specialists, please click here.

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