Accounts Payable (AP) is a kind of account included in the general ledger that shows the pending payments of the short-termed debts of the suppliers and creditors for the company. At the corporate level, AP infers to the debts that are short-term and are owed to the suppliers of the company.
You can check the account payables of a company in their balance sheet every year under the current liabilities sections. A company is obliged to fulfill these debts within a stipulated time to avoid becoming a defaulter.
What is Accounts Payable?
It is used to refer to the department that carries out the payment obligations to the creditors of the company. It is a kind of I owe you (IOU) contract, signed between two parties as legible proof for the short-term debt. The person who is set to receive the amount of this debt, adds it to the assets or accounts receivable of their accounts.
AP holds significance in the balance sheet of any company because if the amount of AP keeps rising year after year, it insinuates that the company is bringing more goods based on credit, and not cash. If this AP falls down, it means more cash is being paid for the purchases, and the debts are being obliged timely without. This also has a substantial effect on the cash flow of a business.
If the company is utilizing the indirect method for the creation of a cash flow statement, the rise and fall of AP are present in the top section, also known as the cash flow from the operating activities. AP is also a tool for the accounting team to modify the cash flow of the company to a certain level.
For example: If the account aims to increase the number of cash reserves, it can delay the period in which the AP is paid by the company. However, paying debts on time always ensures a good rapport with the suppliers and vendors. Late payment could taint that, and hence, the risk of ruining the goodwill should always be weighed in before manipulating the AP.
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How to calculate and record AP?
As per the double-entry rule of accounts, there should always be a credit to offset the debt and vice versa in a general ledger. Hence, to record AP in the accounts, the accountant will credit the said amount for the invoice or bill received. To offset this expense, the entry goes into the expense account of goods and services that are bought on credit. If the asset bought was a capital asset, the debit entry can be its value of it. Hence, if the bill is obliged, the company will debit the AP and credit the cash account for decreasing the balance to be paid.
For instance, if a company acquires a bill of $500 for office stationery. When this invoice goes to AP, $500 will be credited to the AP account and $500 will be debited to the office supply expense in the income statement. The company has put in this entry even when the purchase was on credit as they are following the accrual basis, where no matter if the purchase is made on cash or credit. When this bill is paid, the company will credit $500 and debit $500 in the accounts payable.
The AP will be having more than one credit purchase since the company purchases from more than one supplier at a time. Hence, in AP you can see the total of all the vendors and suppliers of the company in the balance sheet.
Difference between trade payables and accounts payable
Some people tend to use the ‘trade payables’ and ‘accounts payable’ interchangeably, but there are some differences that they miss and it leads them to interchange them. Ap, as we said, refers to the short-term debts of the company. On the other hand, trade payables mean the inventory goods that are taken on credit like office supplies.
For instance, a restaurant has taken goods from a beverage company on credit, then it is a part of the inventory and recorded in a trade payables account. On the other hand. Obligations like staff uniforms, etc. are payable categories. Many companies combine both of these under the AP account, while some prefer to categorize them.
Difference between accounts receivable and accounts payable
Accounts payable and accounts receivable are inversely related. AP is the money that the company owes to creditors and suppliers while accounts receivable is the amount that the other party owes to the company. When a credit purchase happens, one company adds it to the AP account and the other adds it to the accounts receivable account.
