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.
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.