Accounts Payable Interview Questions and Answers

Accounts Payable (AP) is a financial process in which a company tracks and manages its payments to vendors or suppliers for the goods or services they have provided. AP is important for a company because it helps ensure that the company maintains good relationships with its vendors, avoids late payment fees, and manages its cash flow effectively.

The AP flow, or Accounts Payable process, is a set of steps that a company follows to track and manage its payments to vendors or suppliers for goods or services received. Here are the basic steps of the accounts payable process:

Purchase Requisition: A department in the company identifies a need for goods or services and creates a purchase requisition, which is sent to the procurement department.

Purchase order: The process begins with a purchase order that is created when a company decides to buy goods or services from a supplier.

Receipt of goods or services: Once the supplier delivers the goods or services, the company should verify that the order was complete and that the goods or services received are of the expected quality.

Invoice processing: The supplier sends an invoice to the company, which includes the details of the purchase order, the cost of goods or services, and the payment terms. The company should review the invoice for accuracy and enter it into its accounting system.

Payment: The company should then schedule payment of the invoice according to the payment terms. Payment can be made through various methods such as electronic transfers or checks.

Reconciliation: The accounts payable department should reconcile the payments made with the invoices received to ensure accuracy and prevent any discrepancies.

Aging report: The accounts payable department should regularly produce an aging report, which lists all the outstanding invoices and their due dates. This report helps the company manage its cash flow and ensures that payments are made on time.

Vendor management: Lastly, the accounts payable department should maintain good relationships with its vendors or suppliers, and negotiate payment terms that are favorable to both parties.

By following these steps, the accounts payable cycle helps ensure that a company pays its vendors in a timely and accurate manner, while also maintaining good relationships with its suppliers.

An invoice number or invoice ID is a unique identifier assigned to each invoice that a vendor sends to a company for payment. It helps both the vendor and the company keep track of their transactions and payments.

The format of an invoice number can vary depending on the company’s preferences. Some companies use a simple sequential numbering system, while others use a combination of letters and numbers or other identifying information.

Here are some tips for creating invoice numbers:

Sequential numbering: Start with a basic sequential numbering system, such as starting with 001, 002, 003, and so on. This ensures that each invoice has a unique number.

Include date or purchase order number: Include the date of the invoice or the purchase order number in the invoice number to help identify the transaction.

Use a combination of letters and numbers: Use a combination of letters and numbers to create a unique identifier, such as INV001 or AP001.

Consistency: Use a consistent format for all invoices to make it easier to track and organize them.

An invoice is a document sent by a vendor to a company to request payment for goods or services provided. The invoice should include the following information:

Invoice Number: A unique identifier assigned by the vendor to the invoice.

Invoice Date: The date the invoice was issued by the vendor.

Vendor Information: The name, address, and contact details of the vendor.

Company Information: The name, address, and contact details of the company that is receiving the invoice.

Payment Terms: The payment terms agreed upon between the vendor and the company, such as the payment due date and any discounts for early payment.

Description of Goods or Services: A detailed description of the goods or services provided, including the quantity, unit price, and total cost.

Purchase Order Number: If applicable, the purchase order number that was issued by the company for the goods or services provided.

Tax Information: Any applicable taxes or fees, such as sales tax or value-added tax (VAT).

Total Amount Due: The total amount owed to the vendor for the goods or services provided.

Adjustment entries are accounting entries made to correct errors or omissions in the account’s payable ledger. They are made at the end of an accounting period to ensure that the accounts payable balance accurately reflects the company’s liabilities. These adjustments can include reversing incorrect entries, recording accrued expenses or revenues, adjusting for depreciation, or recording an adjustment for goods or services received but not yet invoiced. Adjusting entries are important for accurate financial reporting and help ensure that the company’s financial statements reflect its true financial position.

Accrued Revenue: Accrued revenue is the revenue that a company has earned but not yet received payment for. It is recognized as revenue in the income statement and recorded as a receivable in the balance sheet. For example, a company that provides services over a period of time but bills the customer only at the end of the period would have accrued revenue.

Accrued Expenses: Accrued expenses are expenses that a company has incurred but not yet paid for. It is recognized as an expense in the income statement and recorded as a payable in the balance sheet. For example, a company that has received goods or services but has not yet been billed would have accrued expenses.

Deferred Revenue: Deferred revenue is the revenue that a company has received but has not yet earned. It is recorded as a liability in the balance sheet and recognized as revenue in the income statement when the goods or services are provided. For example, a company that receives advance payments from customers for services that will be provided in the future would have deferred revenue.

Deferred Expenses: Deferred expenses are expenses that have been paid for but have not yet been recognized as an expense in the income statement. It is recorded as an asset in the balance sheet and recognized as an expense in the income statement over the period it benefits the company. For example, a company that has paid for an insurance policy for the next six months would have deferred expenses.

P2P (Procure-to-Pay) is a process that covers the entire procurement cycle, from identifying the need for goods or services to payment to the vendor. The P2P flow involves multiple steps, including requisitioning, purchasing, receiving, invoicing, and payment. The process begins with the requisitioning of goods or services by a department within a company and ends with the payment to the vendor for the goods or services provided. By following a standardized P2P process, companies can increase efficiency, reduce errors, and control costs.

Depreciation, depletion, amortization, and impairment are all methods of accounting for the gradual loss of value of an asset over time. Here’s a brief explanation of each:

Depreciation: Depreciation is the process of allocating the cost of a tangible asset, such as equipment or buildings, over its useful life. This is typically done using a method called straight-line depreciation, which spreads the cost of the asset evenly over its useful life.

Depletion: Depletion is the process of allocating the cost of natural resources, such as oil, gas, or minerals, over the period of their extraction. This is typically done based on the estimated amount of the resource that has been extracted or the estimated amount that remains.

Amortization: Amortization is the process of allocating the cost of an intangible asset, such as patents or copyrights, over its useful life. This is typically done using a method similar to straight-line depreciation.

Impairment: Impairment is a reduction in the value of an asset that is not related to the normal wear and tear or obsolescence. If an asset’s fair value falls below it carrying value, an impairment loss must be recognized in the company’s financial statements.

The R2R (Record-to-Report) process is a financial accounting process that involves recording and processing financial transactions and producing financial statements. The process includes several steps, including journal entries, general ledger accounting, account reconciliations, and financial reporting.

The R2R process begins with the recording of financial transactions in the form of journal entries. These entries are then posted to the general ledger, where they are used to create financial statements such as balance sheets, income statements, and cash flow statements. The process also includes reconciling accounts to ensure that the information in the general ledger is accurate and complete.

The R2R process is critical for accurate financial reporting and helps ensure that a company’s financial statements reflect its true financial position. It is an essential part of the overall financial accounting process and is typically carried out by the finance or accounting department within a company.  

O2C (Order-to-Cash) is a process that covers the entire order cycle, from receiving an order from a customer to receiving payment for the goods or services provided. The O2C flow involves multiple steps, including order entry, order fulfillment, invoicing, and payment.

The process begins with the receipt of an order from a customer. Once the order is received, the order is entered into the company’s system, and the order fulfillment process begins. This may involve picking and packing the goods, preparing them for shipment, and delivering them to the customer.

Once the goods have been delivered, an invoice is created and sent to the customer for payment. The invoice typically includes details about the goods or services provided, the cost, and the payment terms. The customer then reviews the invoice and makes a payment. he O2C process is critical for ensuring that a company is paid for the goods or services provided and helps ensure that the company maintains a positive cash flow.

Vendors can be classified into various types based on their nature of business and relationship with the company. Here are some common types of vendors:

Goods vendors: These are vendors who supply physical goods to the company, such as raw materials, finished products, or supplies. These vendors can be further classified into primary vendors, who are the main suppliers of goods, and secondary vendors, who are backup or alternative suppliers.

Service vendors: These are vendors who provide various services to the company, such as maintenance, repairs, or consulting services.

Utility vendors: These are vendors who provide various utilities to the company, such as electricity, water, or gas.

Professional vendors: These are vendors who provide professional services to the company, such as lawyers, accountants, or auditors.

Employee vendors: These are vendors who provide various benefits and services to employees of the company, such as health insurance, travel services, or employee training.

Government vendors: These are vendors who provide various services to the government, such as construction services or security services.

Purchase Discounts Lost is a term used in accounting to refer to the amount of cash discounts that a company could have received but did not, due to a failure to make payment within the discount period. When a company purchases goods or services on credit, the seller may offer a cash discount to encourage the buyer to make payment earlier than the due date.

A general ledger is a master record of all financial transactions of a company that are categorized and recorded using double-entry accounting principles. It is the central repository of a company’s financial data, including assets, liabilities, revenue, expenses, gains, and losses.

A subledger, on the other hand, is a subsidiary ledger that contains detailed transactional data for a specific category of accounts, such as accounts receivable or accounts payable. It is used to provide more granular information and to help reconcile balances in the general ledger.

For example, a company might have a subledger for accounts receivable, which would show all the details of customer transactions and payments. The general ledger would then summarize this information along with all other financial transactions in the company.

There are four main types of Purchase Orders (PO’s) that companies typically use:

Standard Purchase Orders (PO)

Blanket Purchase Orders (BPO) (Also referred to as a “Standing Order”)

Contract Purchase Orders (CPO)

Planned Purchase Orders (PPO)

Standard Purchase Order: This is the most common type of PO used by companies. It is used to order goods or services from a vendor and contains all the relevant details of the order, such as the description of the goods or services, the quantity, the price, the delivery date, and payment terms.

Blanket Purchase Order: A Blanket PO is used when a company wants to purchase goods or services from a vendor on an ongoing basis. It is used for repetitive purchases and specifies the total quantity of goods or services required over a period of time, typically a year. The terms and conditions of the agreement are negotiated upfront, and the company can issue release orders against the Blanket PO as and when required.

Contract Purchase Order: A Contract PO is used for long-term purchases where the terms and conditions of the agreement are already negotiated between the company and the vendor. The PO specifies the details of the goods or services to be provided, the quantity, the price, the delivery date, and payment terms. The Contract PO is typically used for multi-year agreements.

Planned Purchase Order: Planned Purchase Orders (PPOs) are a type of purchase order that is created for a specific period, typically for a future period of time such as a quarter or a year. PPOs are used when a company wants to plan its purchases in advance, based on expected demand or usage. However, since a PPO is a forecast and not a binding agreement, it does not create any legal obligations for the company or the vendor. Therefore, a PPO may not be suitable for all industries or procurement scenarios, and companies must carefully consider the benefits and risks before using this type of Purchase Order.

Accounts Receivable (AR) is a process in accounting that deals with tracking and managing the money owed to a company by its customers for the sale of goods or services on credit. The AR process includes invoicing customers, recording and tracking payments received, and following up on outstanding payments.

The AR process typically involves the following steps:

Creating an invoice: When a company sells goods or services to a customer on credit, it creates an invoice that details the goods or services provided, the amount owed, and the payment terms.

Sending the invoice to the customer: The invoice is then sent to the customer, either electronically or by mail.

Recording the invoice: The company records the invoice in its accounting system, and updates the customer’s account with the amount owed.

Collecting payment: The customer is expected to pay the invoice within the agreed-upon payment terms. The company records the payment received and updates the customer’s account.

Following up on outstanding payments: If a customer fails to pay an invoice within the payment terms, the company follows up with reminders or collection notices to collect the outstanding amount.

The AR process is essential for maintaining a healthy cash flow for a company. By managing its AR effectively, a company can ensure that it has enough cash on hand to cover its operating expenses and invest in growth opportunities.

Foreign exchange gains and losses on Accounts Payable (AP) occur when a company owes money to a foreign supplier or vendor, and there is a change in the exchange rate between the time the company records the liability and the time it makes the payment.

For example, let’s say a company in the United States owes 100,000 euros to a supplier in Germany for goods it purchased on credit. The company records the liability in its Accounts Payable as $120,000, based on an exchange rate of 1 euro = 1.20 US dollars. However, by the time the company makes the payment, the exchange rate has changed to 1 euro = 1.15 US dollars. This means that the company will actually have to pay $115,000 to settle the liability of 100,000 euros.

In this scenario, the company will experience a foreign exchange gain or loss. If the exchange rate has moved in favor of the company (i.e., the US dollar has strengthened against the euro), the company will experience a foreign exchange gain. If the exchange rate has moved against the company (i.e., the US dollar has weakened against the euro), the company will experience a foreign exchange loss.

USA GAAP (Generally Accepted Accounting Principles) and Indian GAAP refer to the accounting standards used in the United States and India, respectively, to prepare financial statements.

USA GAAP is a set of guidelines and rules developed by the Financial Accounting Standards Board (FASB) and other standard-setting bodies to ensure consistency and comparability in financial reporting by U.S. companies. The GAAP principles are widely accepted in the United States and are used to prepare financial statements for external stakeholders, such as investors, creditors, and regulators.

Indian GAAP, on the other hand, refers to the accounting standards and principles issued by the Institute of Chartered Accountants of India (ICAI) that govern the preparation and presentation of financial statements in India. These standards are designed to ensure that financial statements reflect a true and fair view of a company’s financial performance and position.

While both USA GAAP and Indian GAAP share many similarities, there are some significant differences in their requirements and practices. For example, Indian GAAP requires companies to follow specific accounting policies and practices unique to the Indian business environment, while USA GAAP provides more flexibility in accounting treatment.

There are different ways to classify expenses in Accounts Payable (AP), but here are some common types of expenses:

Operating expenses: These are the day-to-day expenses that a business incurs in order to run its operations. Examples of operating expenses include rent, utilities, salaries and wages, office supplies, and travel expenses.

Cost of goods sold (COGS): These are the expenses that are directly related to the production or acquisition of goods or services that a business sell. Examples of COGS include raw materials, labor costs, and shipping and handling fees.

Capital expenses: These are the expenses that a business incurs to acquire or improve long-term assets, such as property, plant, and equipment. Capital expenses are usually depreciated or amortized over several years, depending on the asset’s useful life.

Interest expenses: These are the expenses that a business incurs on loans, lines of credit, or other forms of debt financing. Interest expenses are deductible for tax purposes.

Depreciation and amortization expenses: These are the expenses that a business incurs to recognize the declining value of long-term assets over time. Depreciation is used for tangible assets, such as buildings and equipment, while amortization is used for intangible assets, such as patents and copyrights.

Non-operating expenses: These are the expenses that are not directly related to a business’s operations, such as losses on investments or lawsuits.

Here are 5 main types of Accounts Payable errors:

Duplicate Payments: This type of error occurs when the same invoice is paid twice, resulting in an overpayment to the vendor.

Data Entry Errors: This type of error occurs when incorrect data is entered into the system, such as a wrong invoice amount or vendor name.

Coding Errors: This type of error occurs when invoices are coded to the wrong general ledger account, resulting in incorrect accounting treatment.

Pricing Errors: This type of error occurs when the pricing on an invoice is incorrect, resulting in an overpayment or underpayment to the vendor.

Payment Timing Errors: This type of error occurs when payments are made too early or too late, resulting in missed discounts or late payment fees.

The P2P (Procure-to-Pay) process and AP (Accounts Payable) end-to-end process are closely related and together they form a critical part of the financial operations of a business. Here is an explanation of the P2P and AP end-to-end process:

Procure-to-Pay (P2P) Process: The P2P process involves a series of steps that begin with identifying the need for a product or service and end with the payment to the vendor. The steps involved in the P2P process include:

Identifying the need for a product or service

Creating a purchase requisition

Creating a purchase order (PO)

Receiving the goods or services

Creating an invoice

Reviewing and approving the invoice

Processing the payment

Accounts Payable (AP) End-to-End Process: The AP end-to-end process involves the handling of invoices from receipt to payment. The steps involved in the AP end-to-end process include:

Receiving the invoice

Validating the invoice against the purchase order and goods receipt

Entering the invoice into the accounting system

Reviewing and approving the invoice

Processing the payment to the vendor

Reconciling vendor statements.

The payment terms in Account Payable can vary depending on the specific agreement between the buyer and the supplier. However, some common payment terms used in India are:

Net 30: Payment is due within 30 days from the date of invoice.

Net 45: Payment is due within 45 days from the date of invoice.

Net 60: Payment is due within 60 days from the date of invoice.

Due on receipt: Payment is due immediately upon receipt of the invoice.

2/10 net 30: If payment is made within 10 days of the invoice date, the buyer can deduct 2% from the total amount due. If payment is made after 10 days, the full amount is due within 30 days from the date of invoice.