Understanding Accounts Payable AP With Examples and How to Record AP


The $500 debit to office supply expense flows through to the income statement at this point, so the company has recorded the purchase transaction even though cash has not been paid out. This is in line with accrual accounting, where expenses are recognized when incurred rather than when cash changes hands. The company then pays the bill, and the accountant enters a $500 credit to the cash account and a debit for $500 to accounts payable. An example of a B2B vendor is Panasonic, which sells batteries to Tesla, or microchip manufacturers, such as Intel or Advanced Micro Devices, which sell components to personal computer manufacturers. The items are being sold to businesses and will, in turn, generally be stored in inventory either for a short or long period of time (depending on the product). A vendor is a party in the supply chain that makes goods and services available to companies or consumers.

  • In business, the use of credit in vendor finance is called an «open account.»
  • The debit could also be to an asset account if the item purchased was a capitalizable asset.
  • If your vendor is used to receiving purchase orders, you’ll get your shipment faster if you send them one.
  • The term «vendor» is typically used to describe the entity that is paid for goods provided rather than the manufacturer of the goods itself.

They may provide their services or maintenance to other businesses or directly to the public. Examples of service providers include gardeners, cleaners, consultants, electricians, and plumbers. Having good relationships with your vendors can be beneficial for your business, and can sinking funds 101 help increase the efficiency of your supply chain. A vendor that sells business-to-consumer (B2C) sells goods or services straight to the consumer, who is the end-user. Below, we will look at some different types of vendors and the different customer bases they serve in the market.

However, once the PO is accepted, it becomes a legally binding contract for both parties involved. Quigley uses his process steps to manage vendors and their projects that deliver products and services. He has applied these principles to large, international clients in the aerospace, automotive, and manufacturing industries. Setting vendor management goals allows you to reap significant value from vendor relationships and serve a vital role in executing business objectives. Purchasing with a purpose allows you to reach your targeted outcomes more quickly and intelligently. Learn how to create a vendor management program by reading our How to Write a Clear, Successful Vendor Management Program article.


Consequently, a healthy, trusting relationship between the borrower and the vendor sits at the heart of the vendor financing dynamic. These days, most companies use an electronic purchase order system, typically managed with accounting software. If you and your vendor disagree and you don’t have a purchase order—which is a legally binding contract—you can end up in a legally tricky position.

Once a vendor and a customer have entered into a vendor financing arrangement, the borrower is required to make an initial deposit. The balance of the loan, plus any accrued interest, is paid over an agreed period with regular repayments. The rate of interest may vary from 5% to 10%, or be more, depending on the agreement between the two parties. Alternatively, in equity vendor financing, the vendor provides the goods or services needed by the borrower in exchange for an agreed amount of the borrower’s stock.

From an operations standpoint, you can track orders more confidently knowing that your supplier is contractually bound to deliver them at a specific time and date. From an accounting perspective, you can budget confidently knowing that you have a contractually-enforced purchase price. Purchase orders are sent by the buyer to the vendor first, and they outline exactly what the order should contain and when it should arrive. It’ll include things like quantity of items, detailed descriptions of the items, the price, date of purchase, and payment terms. Purchase orders play a major role in the inventory management process. When the supplier receives the PO, they will take the items listed in the PO from their inventory.

Expenses are found on the firm’s income statement, while payables are booked as a liability on the balance sheet. A tier 1 vendor is a large and well-known vendor, often enjoying national or international recognition and acceptance. Tier 1 vendors may be both manufacturers and value-added resellers (VARs).

In addition, POs help keep track of incoming orders, and a well-organized purchase order system can help simplify the inventory and shipping process. When a company decides to scale the business, POs can help keep track of what has been ordered and from whom. The Smartsheet platform makes it easy to plan, capture, manage, and report on work from anywhere, helping your team be more effective and get more done. Report on key metrics and get real-time visibility into work as it happens with roll-up reports, dashboards, and automated workflows built to keep your team connected and informed. In this article, you’ll find the most useful ways to maximize the value and opportunities of your company’s vendor partnerships with advice, tools, and tips from top industry experts. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.

How Vendor Management Requirements Differ among Different Types of Organizations

The retail businesses, which operate B2C, then sell the end product directly to the public. For example, a B2B vendor that sells raw materials might sell materials to a manufacturer that uses those materials to create a finished product that it then vends. In this scenario, the business that is buying the materials places a purchase order with the vendor, including information about which materials they want, quantity, and price, among other details.

If your accounting solution doesn’t have that option, Shopify has an excellent purchase order template. Here are four of the most common reasons why companies use purchase orders. Purchase orders serve as legal documents and help avoid any future disputes regarding the transaction.

How to Manage Vendors

If you’re new to creating a vendor management program and composing an official document to represent it, here’s a roadmap to help you understand the program’s progression. Different types of organizations have divergent, sometimes quite exacting vendor management requirements. Some companies take a strictly transactional approach to vendors and aim only to get the lowest possible price, while others treat vendors as partners. Assume that XYZ wants to purchase inventory from ABC at the cost of $1 million.

What Are Vendor Management Goals and Objectives?

Vendor financing refers to the lending of money by a vendor to a customer, who then uses the money to buy the vendor’s inventory or service. The arrangement takes the form of a deferred loan from the vendor, and it may involve the transfer of shares from the customer to the vendor. Vendor financing most commonly occurs when a vendor sees a higher value in a customer’s business than a traditional lending institution does.

For example, vendors who work with the military may need to follow additional requirements and screenings, like taking drug tests or passing a thorough background check. Businesses have more leeway when selecting and managing vendors, but, to achieve optimal performance, their processes should be as fair and transparent as possible. Accounts payable are found on a firm’s balance sheet, and since they represent funds owed to others they are booked as a current liability. “Vendor” is a term that can be applied to sellers in a variety of contexts. The process of how a vendor operates is unique to each vendor situation.

Vendor Financing: Definition, How It Works, Pros, and Cons

The term «vendor» is typically used to describe the entity that is paid for goods provided rather than the manufacturer of the goods itself. However, a vendor can operate as both a supplier (or seller) of goods and a manufacturer. “Every organization can see benefits from third-party vendor management,” Blokdijk observes. The benefits grow from a straightforward, written vendor management program that eliminates ambiguity and guesswork from vendor selection through risk mitigation. In strategic vendor management (SVM), organizations take control, define how they work with vendors, and focus on developing relationships. The proactive approach of SVM supports future success and outcomes that are mutually beneficial to both company and vendors.