Purchases of new inventory are just one small part of the bills that a company has to pay during the month. Your Accounts Payable account can be almost as active as your Cash in Checking account. All costs related to sales plus expenses flow through this account. There are four main functions related to the Accounts Payable account.

As a small company, you probably don’t have four people assigned to just handle these functions, and it’s not necessary. You should have a different person responsible for each of these functions, though. You never want the person who enters the bills to be paid into the system to be the same one who signs checks to pay those bills or sends out those checks. Likewise, you never want the person who signs checks to be the one who mails them out or inputs the billing data. Finally, the checking account should be reconciled by someone who is not responsible for entering bills, signing checks, or sending out checks. As we discussed in Chapter 6, separation of duties is the best way to protect the company’s money internally.

Disbursement of company funds must be properly organized and monitored. Many companies use a purchase-order system to be certain that all purchases have proper approval and that items ordered are paid for only once. After you pay an invoice, be sure to stamp it paid, so you don’t risk paying it a second time. After all items on a purchase order have been received and invoices have been entered into the system, the order is closed and a new purchase order must be approved before more items can be bought.

A well-managed Accounts Payable account not only ensures that the bills are paid, but it can also monitor payments to ensure that the company takes advantage of all available discounts offered for timely payment. Also, you want to be sure bills are paid on time so you don’t end up with interest charges or other penalties for late payment. The next chapter provides more information about purchase discounts.