In an attempt to demystify terms and jargon you may have heard but not quite understood please find enclosed the APA guide to terms and jargon.
Welcome to our guide to terms and jargon relating to AP
1) Accounting Period
This is a term used to describe a typical accounting reporting period within an organisation and ties into profit and loss accounts and balance sheet production. In most organisations there are twelve months in an accounting period, although some businesses prefer to have thirteen x four week account periods instead.
2) Accounts Payable
Accounts Payable is very much what we are all about here at the APA! The Accounts Payable refers to an amount owed for goods and services purchased but not yet paid for.
Accounts Payable within a balance sheet can also sometimes be referred to as “Bought Ledger” or “Purchase Ledger”.
Accounts payable, now you’re speaking our kind of jargon!
Accruals are an accounting concept (also sometimes called “matching”). Accruals occur where an organisation “accrues” for expenses that have been incurred but for which no invoice has been received yet, a good example of this could be gas and electricity charges.
4) Aged Creditors Report
An aged creditors report shows all creditors (i.e. parties owed money to) and ages the debt by how long the payment has been due.
5) Audit (Internal or External)
An audit is an examination of the accounts of an organisation. Audits are undertaken to check that accounts are being produced to legal standards and accounting rules. Internal Audits are completed by organisational staff and check accounts prior to external auditors and also aim to improve internal process efficiencies.
BACS stands for Bankers' Automated Clearing Services and is the way that direct debits and direct credits are paid in the UK.
7) Balance Sheet
The Balance sheet is part of an organisations monthly accounts and is a statement of all the assets and liabilities in a structured format. An Accounts Payable balance would feature in the balance sheet as a current liability.
CHAPS stands for Clearing House Automated Payment System and is an electronic payment method which enables same day payments to be made. This could be a technique used to make urgent payments in situation where an account has been placed on stop for non-payment.
9) Credit Note
A credit note is a document showing a refund to a customer (so it’s the opposite of an invoice). For matching purposes the credit note would virtually always show an original invoice number the credit note refers to, although this does not always apply.
A creditor is an accounting word for a party to whom money is owed, or an account is payable! These are also sometimes called liabilities.
11) Direct Debit and DDI
DDI stands for Direct Debit Instruction; these might be put in place to pay a regular amount to a supplier. A direct debit is the settlement of an amount due by regular payments which are collected by the party owed money to directly from a bank account.
EFT stands for Electronic Funds Transfer: This is any process used to transfer funds electronically, examples are BACS and CHAPS.
13) Electronic Invoicing
Electronic invoicing is where an invoice is presented electronically, e.g. could be sent by Email, on a CD or via an internet invoice. Electronic invoicing is seen as a way of the future due to the time saved on data entry, although concerns surround tying invoices to purchase orders.
ERP stands for Enterprise Resource Planning and often an ERP system (such as Oracle). Functionality varies from ERP system to another, but Accounts Payable is a standard feature of all ERP systems as it’s a process that every organisation uses.
Many AP staff use an AP module within an ERP system
Factoring is a method used by organisations to improve cashflow. An organisation pays a commission to a factoring company to receive early payment of an invoice. The AP function then needs to settle the invoice by paying the factoring company.
16) General Ledger
The General Ledger holds all the accounting information for every profit and loss and balance sheet account. This is also sometimes referred to as Nominal Ledger.
17) Goods Received Note
Sometimes abbreviated to GRN, this note verifies goods ordered via a Purchase Order (PO) can be paid as they have been received.
18) Gross Cost
The gross cost is the total cost of an invoice for all goods and services inclusive of VAT.
IBAN stands for International Bank Account Number; this is used by AP departments to make international payments.
20) Key Performance Indicators (KPIs)
KPIs are a measure of how successfully an organisation is trading across a range of measures. For AP popular KPIs would include i) average cost to process an invoice and ii) average time taken from approval to invoice payment.
What are the KPIs in your AP department?
21) Net Cost
The net cost; is the cost of goods and/or services exclusive of VAT.
22) P&L Accounts
The P&L’s are “profit and loss” accounts; these are prepared for each accounting period (usually monthly). The AP function has a major role to play in P&L’s by processing the purchase invoices which form the expenses in the accounts.
23) Pro-Forma Invoice
A pro-forma invoice is often used at the quotation stage and is not an invoice which needs to be paid. All the information on an invoice is there, e.g. goods description, quantity, net cost, VAT, gross cost, date, etc. VAT cannot be reclaimed from a pro-forma invoice.
24) Purchase Ledger Control Account
The Purchase Ledger Control Account is a Nominal Ledger account representing the total amount due to suppliers.
25) Purchase Order
Often called a PO, the Purchase Order describes all the good and services ordered, including quantity, unit price and extended cost, etc. Invoices should be checked against the originating PO to verify goods were actually ordered.
26) Remittance Advice
A remittance advice is a document sent to a supplier when a payment has been made (whether paid by cheque or electronic). Increasingly remittance advices are viewable online and/or emailed to save on postage costs.
27) Settlement Discount
A settlement discount (sometimes called a prompt payment discount) is a discount received for paying a supplier promptly or within the stated terms to receive an early payment discount.
28) Standing Order
A standing order is a fixed payment amount paid on a specific and regular payment date from a customer’s bank account. This type of payment transaction can sometimes occur in AP.
29) Statutory Accounts
Statutory accounts are a legal requirement and are the preparation of the organisations accounts in a prescribed format set-out by law. These accounts will be audited and signed off by external Auditors.
A statement is a document issued by a supplier to the customer showing all transactions (invoices and credit notes) and a total amount due. Formats vary but typically the statement would age the payments due, e.g. current month, 30 day +, etc.
31) Year End
Year end is the name given to the date of the final day of trading in the companies yearly accounts. This date will be used in the statutory accounts and for convenience is usually the last day of a calendar month (e.g. 31st March, 30th June, 31st December, etc.)