Accounts payable (AP) refers to a general ledger account in which a company is responsible for repaying a short-term loan to suppliers or creditors. The term “AP” can also be used to denote the business division or division responsible for making payments on behalf of the company to suppliers and creditors.
Understanding Accounts Payable (AP)
On a company’s balance sheet, the current liabilities section will show its total accounts payable balance at any time. To avoid default, accounts payable are obligations that must not be paid within a certain timeframe. AP is a term that refers to short-term payments to suppliers at the corporate level. The payable is basically a short-term IOU that two entities or businesses sign. People who do business with each other would record the deal as an increase in their accounts receivable.
AP is a crucial component of a company’s balance sheet. If accounts payable (AP), increases in the previous period, it means that the company is buying more goods and services with credit than cash. If a company’s AP falls, it means that it is paying back prior period debts more quickly than buying new items on credit. Cash flow management requires the management of accounts payables.
The cash flow statement prepared by the indirect method shows the net increase or decrease in AP over the previous period. Management can alter the cash flow of a business by using Accounts Payable (AP). Management can, for example, extend the time it takes for the business’s outstanding accounts receivables to be paid. This ability to pay later should be balanced with the company’s ongoing relationships and vendors. It is a good business practice to pay bills on time.
Maintaining Accounts Payable Records
Double-entry bookkeeping is about ensuring that every entry into the general ledger has an equal and opposite credit and debit. An account payable is credited to accounts payable when an accountant receives a bill. The debit offset is generally applied to the expense account for the credit-purchased product or service. The debit could also be applied to an asset account if the item was a capitalizable property. The accountant debits the account payable when a bill has been paid. This reduces the liability balance. Cash accounts are credited in the reverse direction to decrease the cash balance.
Let’s say a business receives $500 for office supplies. A $500 credit will be recorded in accounts payable after receiving the invoice from the accounts payable department. A $500 debit for office supply expenses will be recorded. The $500 office supply expense debit flows to the income statement at this point. This indicates that the company has recorded the purchase transaction, even though no cash was exchanged. This is consistent with accrual accounting, which recognizes costs as they occur, not when cash is exchanged. After the bill is paid, the accountant adds $500 to the cash account. The debit for accounts payable amounts to $500.
A business could have multiple outstanding payments to vendors at any one time. All outstanding vendor payments are recorded in accounts payable. Anyone who looks at the balance sheet will be able to see the amount owed by vendors and short-term creditors. This total amount can be seen on the balance sheet. Let’s say the company mentioned above received a $50 bill to pay for lawn care services. The total of the account payable entries before the company paid these debts would have been $550.
Examples of account payables
When a business owes money but has not paid for products or services rendered, it is called a “payable.” This could happen if you purchase something on credit from a vendor, or if you pay in installments after receiving it.
Accounts payable Vs. Business Expense
Some believe accounts payable means routine expenses that are not related to core business operations. However, this is incorrect. The income statement shows expenses and account payables are listed as liabilities on the balance sheet.
