Accounts payable definition depicts that Accounts Payable means the amount a company owes to third parties. It is a current liability, in contrast to account receivable, which is a current asset. The two are opposite sides of the same coin. Any goods purchased on credit where the payment can be made after a short period of time is known as accounts payable In short it is the liabilities that a company bears for a short period of time”. This credit created by accounts payable increases “Current liability” and hence it is recorded in the liability side of the balance sheet. For a better understanding of what does account payable means. We can easily relate it to our day to day life. We all consume some services such as Electricity for example for a whole month i.e. 30 days or 31 days in return we pay at the end of the month to the company.
This is a relevant example to what is account payable? Here the services are given on credit by the company increasing their liability which would be paid in the following month within the dedicated due dates or deadlines which will ultimately reduce the liability. However, for the time being the credit of service given by the company increases its current liability. Say for example, if company A buys certain goods from company B on credit with a timeline of 15 days, the amount would be account payable for Company A but Account receivable for company B. Hence the name itself suggests that the effect is on creditors, the more the creditors the more the accounts payable amount. It is also sometimes referred to as trade accounts payable.
Please Note the Two Factors to Be Considered Primarily Important While Recording Accounts Payable Is:-
Proper record of the time by which the money needs to be paid and accurate amount to be disclosed helps in the transparency and acceptability of the accounting treatment
Accounts Payable Procedure/ AP Accounting:-
The Account Payable Process Flow Depends on Various Factors Such As:-
Let’s us understand the end to end process :-
This stage of accounts payable is the initial stage which specifies the importance of the authenticity of the transaction and for further scrutiny of the transaction. A valid invoice with proper records needs to be obtained along with the goods or services. This also helps in the documentation of records. Certain important factors to look at in the invoice can be vendor’s name, date, time, requirements raised at the time of purchase, quantity, proper stamp and signature. Always match the details of the actual goods or services received with the invoice provided along with the goods or services.
This stage deals with the documentation aspect of the process. As and when the invoices are received and after scrutiny, the invoice details must be updated in the ledger accounts. In case a company uses software then entries are to be made in the software after proper approval also a “Maker and checker” step can help to reduce error and dual verification is also ensured.
This stage deals with the payment part of the process, where the decided due date of the goods received or service provided requires the unpaid amount to be paid by the buyer. The documents which are essential at this stage can be vendor bank account details, payment voucher, purchase order or contract or agreement with the vendor and supplier. A gentle reminder before the due date to the supplier is a good practice in order to not land in the situation of defaults or continuous chasing behind the supplier.
This is the end part of the accounts payable cycle, as soon as the unpaid amount is paid, vendor books need to be closed. This would result in the reduction of the liability in the books of account of the company. The amount shown as current liability will no longer be treated as a liability. The steps are a generic process flow for understanding the meaning of accounts payable (AP) but can be different within different organizations.
Account payable management is one of the most important business processes that help in managing accounts payable obligations of the entity in an effective and timely manner. Account payable management is an important tool for the sound functioning of the business. Let us learn the importance of Accounts paying management:-
It assists the company in timely payment to vendors which ultimately result in long term relationships with the vendor and help in maintaining strong creditworthiness with the vendor for future business as well.
Ensuring Proper Flow of Business
It helps to ensure proper flow of goods or services by the vendor for future as well without any hurdles and also attracts discounts and benefits with the vendor.
Ensuring the Deadlines or Due Date
It helps to ensure the important due dates and helps the company to never come in the list of defaulters
Proper Cash Flow Management
It helps to maintain proper cash inflows and outflows by timely evidencing the transaction. Account payable management helps a company to verify the authenticity of the invoice as well as proper internal control helps to safeguard the company from any fraudulent invoices or unfair practices or exceptional losses.
A purchase order or PO is a document that provides account payable details relating to the requirement of the purchase such as Quantity, description of goods, amount, tax component, payment terms, the validity of the purchase order, address and name of the vendor, the total amount.
Bill or Invoice is sent along the goods or services which are properly authorized by the vendor.
Accounts payable is the recording and processing of financial transactions relating to procurement and supplies. The roles can be specifically divided into:-
Data entry role:-
Feeding the system with invoice details accurately
Payment processing role:-
Ensuring timely payment of invoices to maintain proper creditworthiness
Handling disputes and legal matters:-
Providing timely redress of disputes if any, and helping the company maintain a healthy relationship with the vendor or creditor.
Vendor or creditor maintenance:-
Properly recording and timely recording of the vendors or creditors database.
Accounts payable manager:-
Ensuring the team is coordinating well with the vendor and proper documentation of invoices are happening for accuracy and efficiency. Accounts Payable Accounting (AP) Accounting:- When recording accounts payable entry; debit the assets and credit the accounts payable account. Assets Dr. To Accounts payable Cr. When the payment is made, Debit the accounts payable account and credit cash or bank. Accounts Payable Dr. To Cash or Bank Cr. Accounts payable forms an integral part of the balance sheet and is directly related to cash flows affecting the financial position of the company and cash cycle. Like every component of the balance sheet, Accounts payable can also be forecasted in a financial model with below approaches:-
DPO= Average accounts payable / Cost of goods sold or purchases X 365
The more data you have, the more accurate your future accounts payable forecasts will be and you will be able to identify trends. You can also improve your cash flows and maintain your desired cash flow and desired cash cycle to avoid liquidity problems or a shortage of cash.
Recently the accounts payable process has changed into an automation process often referred to as OCR automation. It automates, centralizes and simplifies every bit of the accounts payable process. A manual process simplified into a time saving and convenient manner.
Masters India’s All in One Software Provides a Seamless and Real-Time Solution for Vendor Payment Management. Our Software Ensures:
Accounts Payable and Accounts Receivable are the antitheses. Account payable means the amount a company owes to another company or a service provider. In contrast, account receivable means the amount owed to the company. Account receivable is an asset to the company. On purchasing a service or goods, one of the parties will register the amount as a payable accounts whereas, the other party will add it as an account receivable on their balance sheets. Let’s discuss a few accounts payable examples that explain the accounts payable meaning. Company A and Company B are in a business relationship. Company A makes a purchase from company B on credit. This amount needs to be paid back within the stipulated time. Now, for company A, this amount will be registered as accounts payable. On the contrary, for company B, this amount will be registered as accounts receivable. The concept of accounts payable can be generalized to our day-to-day lives as well. Just like companies purchase goods and services on credit, we too purchase services like house cleaning, electricity, data connections, and tv connections. Most of us pay our dues for the month, towards the month-end. Another account payable example can be an employee receiving his salary towards the end of the month for his services to the company.
The term Trade Payable is often used interchangeably with accounts payable. However, the two differ significantly. Trade payable is the money a company owes to its vendor for materials or supplies which are a part of the inventory. In contrast to this, the meaning of account payable is the total sum a company owes.
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Accounts payables are the liabilities that a company bears for a short period of time. Say for example, if company A buys certain goods from company B on credit with a timeline of 15 days, the amount would be account payable for Company A but Account receivable for company B.
Accounts payable is a liability hence it’s closing balance will always be a credit balance.
Accounts payable is considered a current liability and recorded on the balance sheet side of the books of accounts. Accounts payables helps vendors purchase goods on credit without having to immediately pay for the goods purchased.
Accounts payable is a short term liability, which gets converted into expense when paid off.