Accounts payable means a liability to a creditor that’s carried on an open account. It is usually for the purchases of good and services.
When a company orders and receives good or services in advance of a payment, we usually say the company is purchasing on account or credit. The supplier of the goods is referred to as the creditor. If the company that receives the goods, do not sign a promissory note, the supplier’s bill will be recorded in the company’s liability account “Accounts Payable” or “Trade Payables.”
It is expected for a liability account that Accounts Payable will have a credit balance. In double-entry accounting, it is required that Accounts Payable be credited and another account debited. When the liability account decreases, Accounts Payable is paid off, the account will be debited and cash will be credited. The credit balance in Accounts Payable must be equal to the amount of vendor invoices that have been recorded but left unpaid.
Under the accrual accounting method, the company receiving the good or services on credit must report the liability on the day it was received. The same date is used to record the debit entry to an expense or asset account, depending on the transaction. Accountants ague that in accrual accounting, the expenses are reported when they are incurred, rather than when they are paid.
Accounts Payable can also refer to the person or staff that processes the invoices from the vendors and pays the bills of the company. Now you know why a supplier would like to speak to accounts payable if he’d like to inquire about his payment.
The accounts payable process involves the reviewing of an enormous amount of detail This is done to ensure that only the legitimate and accurate amounts are entered into the accounting system.
Most of the data that must be reviews, will be found in the following documents:
- Purchase orders that are issued by the company.
- Receiving reports issued by the company.
- Invoices from the suppliers the company purchased from.
- Contracts and other agreements.
The accuracy and overall completion of a company’s financial statements are dependent on the accounts payable process. It is in the same regard, a important as the whole general ledger.
A well managed accounts payable process will include the following:
- The processing of accurate and legitimate invoices from the supplier.
- Accurate and detailed recordings in the appropriate general ledger accounts.
- The accrual of expenses that have not been completely processed.
The efficiency, effectiveness and accuracy of the accounts payable process will influence the company’s cash position, credit rating and the relationship with its suppliers.