What is Accounts Payable?
Accounts payable serves as the action side of a business’s financial ledger. It is the amount of money that is owed by your business to its creditors. Accounts payable is a subset of the current liabilities account on a company’s balance sheet, which measures the company’s ability to pay its short-term financial obligations. Accounts payable represents creditors’ claims on a company’s assets that arise from the purchase of goods and services on credit.
A properly maintained accounts payable system is an important component of managing cash flow, ensuring everything is paid on time and that the business maintains good relations with its creditors and vendors.
How Accounts Payable is Recorded
Accounting for accounts payable requires offsetting a company’s liabilities on its balance sheet by its various current liabilities accounts, such as accounts payable, short-term debt, and accrued expenses.
A company’s account payable is recorded on its balance sheet as a short-term liability. To record the company’s obligation to pay its creditors, the accountant will make entries in the accounts payable ledger. This is usually done at the same time that the company’s accounts receivable ledger is recorded to better reflect the business’s overall financial position.
Structure and Process of Accounts Payable
The process of managing accounts payable is typically structured in such a way as to maximize its efficiency and effectiveness as much as possible. The central tenant of this process is to ensure that all payments to creditors are made in full and on time, while also keeping track of spending patterns to better make decisions and budget resources in a responsible manner.
The structure of the accounts payable process typically includes the following steps:
1. Purchase orders. This is what the company sends to its vendors when requesting goods or services.
2. Invoices. This is what the vendor sends to the company to show how much they are owed for goods and services provided.
3. Payments. The company will make payments to the vendor for the goods and services provided.
4. Adjustments. If necessary, the company will make adjustments to its accounts payable ledger in order to reflect any discrepancies or errors that may have occurred in the accounts receivable or accounts payable process.
5. Reconciliation. This is the process of ensuring that all payments made by the company are recorded in the accounts payable ledger and that the corresponding debits and credits have been cleared in the accounts receivable ledger.
Benefits of Accounts Payable
The main benefit of accounts payable is that it keeps track of all the company’s payments, thus enabling it to manage its cash flow in an efficient and effective manner. Additionally, accounts payable helps the company to stay organized and up-to-date with its financial obligations and allows it to issue accurate reports to its creditors.
Finally, the accounts payable process can also help the company to develop better relationships with its creditors and vendors, since it ensures that all payments are made on time and accurately. This can help the company secure better terms and discounts from these creditors and vendors and can ensure that the company is able to secure what it needs to continue operations.