What are Accounts
Payable?
Accounts Payable (AP) is an account that
represents a company’s obligation to pay off its debts to its supplies or
creditors in a short period of time. In a nutshell, it is the amount payable by
the company to its suppliers or creditors. It must be paid within a given
period to avoid default. It is a short term debt payment due to suppliers. The
other party records it as accounts receivables.
If AP increases in the
balance sheet under liabilities, it means that the company is buying more goods
or services on credit rather than paying cash. And if AP decreases in the
balance sheet, it represents that the company is paying its debts at a faster
pace than it is purchasing new items on credit.
Recording Accounts
Payable:
We are well aware that
proper double entry bookkeeping requires debit and credit of all entries made
into the general ledger. Now to record AP, the accountant credits accounts
payable when the bill or invoice is received. The debit offset of this entry is
to an expense account for the goods and service that is purchased on credit.
After the due amount is paid, the accountant
debits accounts payable to decrease the liability balance.The offsetting credit
is made to the cash account, which also decreases the cash balance.
Let's
take an example here: The business gets an invoice of $600 for office supplies.
The accountant will record $600 credit in accounts payable and a $600 debit to
office supply expense.after the company pays the bill, the accountant enters
a $600 credit to the cash account and a debit for $600 to accounts
payable.
So
outstanding payments fall under accounts payable. The total amount reflects on
the balance sheet. A simple mistake in AP can cause a large overpayment. The
most common mistake could be - duplicate invoices. Electronic invoices can be
very helpful for the AP department. Vendors can submit their invoices over the
internet and then it can be automatically processed. The amount of time and
money taken to process these invoices are greatly reduced.
Why is management of AP
important?
Management of Accounts
payable is vital for smooth functioning of any business:
- It takes charge of paying the vendors on time and keeps good and healthy relationships with the vendors.
- Once the dues are paid on time, suppliers will provide goods on a timely basis and this will help smooth flow of the business.
- A good AP intercepts there are no dues, penalty for overpayments.
- It enable businesses with proper cash flow
Accounts payable must be
recorded accurately for a company’s financial statements to be complete and
accurate.
Also Read About – Accounts Receivable
Accounts Payable
Process:
- Receiving the bill:
The invoice helps in tracing the quantity of
goods received.
- Scrutinizing the bill:
The name of the vendor, date, authorization, and
requirements raised with the vendors based on the purchase can be verified.
- Updating the records for the bill:
Ledger accounts connected to
the bills received need to be updated. The expense entry is required to be made
in the books of accounts.
- Making timely payments:
As the due date arrives, payments have to be
processed. The required documents need to be prepared. Once the payment is made
to the vendor, the ledger account has to be
closed in the books of accounts. This will reduce the liability earlier
created.
The above process may vary
company to company. But this is a basic process. The steps are covered to avoid
frauds and errors.
What Is
Included in Accounts Payable?
Accounts Payable is on a
company’s balance sheet as a current liability and is a collection of
short-term credits extended by vendors and creditors for goods and services
received by a business. An AP department also takes care of internal payments
for business expenses, travel and petty cash.
Summary:
- Accounts payable is the amount due to be paid to vendors or suppliers for the goods or services received that has not been paid off
- The sum of all balance amount to be paid to vendors are shown on company’s balance sheet
- The increase or decrease in Accounts payable from the prior period appears on the cash flow statement.
- Management may choose to pay its outstanding bills as close to their due date possible to improve the cash flow.
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