Not sure what accounts payable means? Want to know how businesses keep track of the money? Accounting shows what a business has earned or owes.
In this article, I will describe what accounts payable means, how it differs from accounts receivable, and how it works in real life.
What Is Accounts Payable? Meaning and Definition in Accounting
Accounts payable (AP), in simple terms, means the money that needs to be paid to the seller after a period of time. It is basically a credit. This happens when a business buys things on credit, meaning to pay later. The total outstanding amount is shown as a current liability on the company’s balance sheet, and current liabilities are debts to pay within one year. It can help you manage the cash and supplies of the business.
Example: If you buy office equipment and want to pay for it within the next 30 days, that amount is called the amount payable.
Accounts Payable and Accounts Receivable: Meaning
Two terms that need to be known in business finances are accounts payable and accounts receivable. They sound similar but are opposites.
- Accounts Payable is money the company owes to suppliers. It shows cash going out.
- Accounts Receivable is money customers owe the company. It shows cash coming in.
Both appear on the balance sheet. Accounts payable is known as a liability, while accounts receivable is an asset.
Difference Between Accounts Payable and Accounts Receivable
| Feature | Accounts Payable (AP) | Accounts Receivable (AR) |
| Meaning | The money business owes suppliers | The money customers owe the business |
| Balance Sheet | Liability (debts to pay soon) | Asset (money to receive) |
| Cash Flow | Money going out | Money coming in |
| Purpose | Pay bills on time | Collect money from customers |
| Examples | Supplier bills, utility charges | Customer invoices for sales |
| Department Responsible | Accounts payable team | Accounts receivable team |
Role of Accounts Payable in Business
The accounts payable team works to pay supplier bills on time. They make sure all bills are correct and approved. Paying late can cost extra fees or hurt business-supplier relations.
This team also helps manage cash by deciding the best time to pay bills. They use checks to avoid mistakes and fraud. A good accounts payable system helps the whole business run well.
How Does Accounts Payable Work in Accounting?
Accounts payable uses double-entry bookkeeping. It works like this:
- When a bill comes in, the business writes down what was purchased. At the same time, it notes that money is owed to the supplier.
- Later, when the bill is paid, the record of money owed is removed, and it shows that cash has gone out of the business.
This way, the books always tell two things
Accounts Payable Process Step-by-Step
Here’s how accounts payable happens in a business:
- Step 1: Get the bill from your supplier. Mentioning the credit.
- Step 2: Send the bill after checking it properly to the payment team.
- Step 3: Schedule the payment.
- Step 4: Record the payment in the entry book.
- Step 5: Update your system to show the bill is paid and keep a record of the transaction.
How Accounts Payable Works in Simple Real-Life Terms?
Imagine a small office orders chairs on credit. The furniture company sends a bill asking to be paid in 30 days. The office checks that the chairs came and that the bill is correct. Then they approve and schedule payment for the 30th day of the month. When the payment is made, accounts payable and cash go down.
This example shows how accounts payable tracks money owed and ensures on-time payments. This keeps suppliers happy and loyal.
What Is Accounts Payable Turnover? Understanding the Ratio
Accounts payable turnover shows how fast a company pays its suppliers. It helps determine how well the company manages bills and cash.
Formula: Accounts Payable Turnover = Total Supplier Purchases/Average Accounts Payable
- Total Supplier Purchases means all credit purchases during the time.
- Average Accounts Payable simply means the average of the amount owed at the beginning and the end.
Notes: There are two types of ratios: High ratios and low ratios. A high ratio means you are making quicker payments, while a low ratio indicates slower payments.
Summary
Keeping track of accounts payable can help you avoid late fees and keep your cash flow steady. In this guide, I have explained what accounts payable and receivable are and other related terms that you need to know. I’ve also shared simple steps to manage your bills better.
So are you ready to take control of your payments and make your suppliers happy? Let’s get started!
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