What is ‘Accounts Payable’?

accountant-with-penAccounts payable (AP) refers to money owed by a business to its suppliers. In other words, it is an accounting entry which represents a company’s commitment to pay-off any short-term debt to its creditors. The accounts payable entry is entered in the balance sheet under the current liabilities section.

When a business orders goods or services without paying for them upfront, we say that the business is buying the goods on account or on credit. The person or entity which supplies the goods on credit is the creditor. If the company takes the goods and does not sign a promissory note, the supplier’s bill will be recorded by the company in its liability account as Accounts Payable or Trade Payable.

Since Accounts Payable is a liability account, it will typically have a credit balance. Therefore, when the supplier’s invoice or bill is recorded, AP will be credited, which also means another account will have to be debited as is the norm in double-entry accounting. When debt is settled, Accounts Payable will be debited and Cash will then be credited. Therefore, credit balance in Accounts Payable will be equal to the amount of supplier invoices that have been entered in the books but are yet to be paid.

In the accrual method of accounting, the entity that receives goods or services on credit must report the liability on the same day that they were received. This date will be used to record the debit entry in an expense or asset account as appropriate, hence the saying that “expenses are reported when they are incurred”, and not when they are paid.

Accounts payable can also be used to refer to the person or member of staff who processes supplier invoices and pays the bills of the company. This is why a supplier who is yet to be paid usually makes a phone call to the company asking to speak to “accounts payable”.

Tracking Accounts Payable

The accounts payable process entails reviewing a lot of detail or information to make sure that only the legitimate amounts are recorded in the accounting system. Most of this information will be found in the following documents:

  • Invoices from the company’s vendors
  • Purchase orders that are issued by the company
  • Receiving reports that are issued by the company
  • Contracts and other agreements

The accuracy of a company’s financial statements depends on the accounts payable process. Legitimate vendor invoices must be processed accurately without much delay. The persons responsible for the recording must be careful to record the correct information in the appropriate general ledger accounts.

The effectiveness of the accounts payable process can also affect a company’s tax position. If you are not up to date with your ledger you may incur more tax at year end than you should, as expenses that could be taken into consideration are not on the books. If you’re in the Belfast area and need tax advice, these Belfast Accountants can help. If you’re Dublin based try this link.

Ultimately, the effectiveness and efficiency of this process will affect the cash position and credit rating of the business, and also its relationships with suppliers.

To ensure that the process runs well without hiccups, it is always advisable to work from the original invoice. When the invoice is sent electronically, print it, and then file a copy of the email to reduce confusion. Every invoice should be entered individually, and this includes multiple monthly invoices from the same vendor.