What is Accounts Payable: Meaning, Process, Examples, Cycles, & Entry
Accounts payable means any amount that a business owes to its vendors. When a company buys goods or services on credit from a supplier, they usually don't make payments immediately. It's due in 30 days, 60 days, or in certain situations much longer. Late payments or defaults happen when sums due to suppliers and other third parties are due. This is why it is important to keep track of these payments. Get all the details in the following sections below.
Accounts Payable: What is it?
Accounts payable is a liability owed to one creditor specifically when that creditor places an order for products or services without paying in full upfront, indicating that you purchased the items on credit. The phrase "accounts payable" is not just prominent in businesses. Accounts Payable exist for individuals as well. It is more like a short-term debt that one must pay back in time. Default in payments might result in interest payment or penalty.
Recording of Accounts Payable
Accounts payable is typically calculated by debiting the expense or asset account linked to purchase and crediting the accounts payable account. The creditor makes an entry that debits the accounts payable account (which eliminates the liability) and credits the cash account. A double-entry bookkeeping method uses this accounting procedure.
Process of Accounts Payable
Accounts payable strictly follow a procedure to record the transactions. Otherwise, there might be defaults in calculations which can lead to discrepancies in the balance sheet of a company. This procedure generally includes the following steps:
Step 1: Receiving Invoice
Receiving an invoice typically entails manually entering invoice information (vendor information, line items, amounts, and GL (General Ledger) code into a database. This poses issues related to precision and human error.
Additionally, the recipient should strictly send the invoice to the payables department right away. It is especially problematic when bills are issued through email to former employees of the business. In this case, the supplier may need to make several enquiries before the invoice is verified.
Step 2: Review and Approval
Invoice approval is the process of reviewing and approving supplier invoices. An Accounts Payable team member frequently physically carries the paper invoice around the office to get the required approvals. This takes place before a cost is recorded into the ERP and a payment is sent.
Step 3: Payment Authentication
Once an invoice is ready for payment, you must obtain authorization before sending the money. This information comprises the due date, the mode of payment, and the payment total.
Step 4: Paying Suppliers
The accountant runs an initial check and confirms it on every scheduled payment day to make sure that all indicated payments must be made. If not, they are marked for payment later. Cheques or electronic payments are used to make outstanding payments. These payments might need to be authorised before they are given, depending on the restrictions in use.
Examples of Accounts Payable
Any time a company owes money for goods or services that have been delivered but have not yet been paid for by the company, a payable is generated. This can be through a credit purchase from a vendor, a subscription, or an instalment payment that is due after receiving goods or services.
Electricity, telephone, broadband, and cable TV networks are some examples for individuals. The bills are produced near the end of the month or during a certain billing period.
Accounts Payable vs. Accounts Receivable
Accounts receivable are short-term liabilities owed to a business by its clients. These are the opposite of accounts payable. The primary distinction between the two is that accounts payable represent a company's short-term obligations to its suppliers, and accounts receivable represent short-term obligations of different clients to a particular business.
Another difference is that whereas accounts receivable is categorised as a short-term asset, accounts payable is a short-term debt. Account receivables are registered with a debit to the accounts receivable account, whereas accounts payables are registered with credit to the accounts payable account.
Trade Payable vs. Accounts Payable
Although people use the terms "accounts payable" and "trade payables" frequently and synonymously, they actually have slightly different meanings. The term "trade payables" describes the sum owed to suppliers for inventory, including tools, supplies, and other commercial items. The term "accounts payable" describes the accrued payments or obligations that a company owes, such as for labour, leasing, and other expenses.
A balance sheet for a business displays accounts payable, whereas an income statement displays expenses. Accounts payable means a liability, and it stays under "current liabilities" in the balance sheet. Current liabilities often have a duration of fewer than 90 days. If you are planning to launch a business of your own it is crucial to have a detailed idea of accounts payable, accounts receivable and others.