Accounts payable is central to bookkeeping. It helps small business owners determine to whom they’ll pay debts, and it’s also helpful in noting the amounts on your balance sheet.
While you may think accounts payable only refer to short-term debt, there are some valuable things you should know. Continue reading to learn important things you should know about accounts payable as a business owner.
What is Accounts Payable?
Accounts payable represent the debts owed to vendors and suppliers for services and goods sold. In essence, accounts payable encompass the outstanding payments awaiting settlement, acting as a vital component of your business's financial obligations.
Accounts Payable vs. Accounts Receivable
Accounts payable differs from accounts receivable in a significant way: accounts payable is a liability, but accounts receivable is an asset.
Accounts Payable vs. Trade Payables
While accounts payable and trade payables are similar, there are distinct differences between the two terms.
Trade payables are also liabilities but for different purposes. Trade payables comprise money a company owes to its vendors for inventory-based goods. These goods are ready to sell or materials used to make goods that are also ready to sell.
You can list trade payables as current liabilities or long-term liabilities, but you can only list accounts payable as a current liability.
Where to Find Accounts Payable
You’ll find accounts payable in the general ledger, and you’ll also find accounts payable on the balance sheet.
You’ll find accounts payable as a current liability on the balance sheet, which is what a business owes but has yet to pay.
Accounts Payable Process
The accounts payable process has five steps:
- Create the Purchase Order
The first step of the AP process begins with the purchase order, a document that signals your intent to acquire goods or services from a vendor. It will outline the details of the transaction, including quantities, prices, and delivery terms.
- Acquire Assets
Next, the assets arrive. Once they arrive, inspect them with a discerning eye. Ensure they meet your expectations and match the details specified in the purchase order.
- Evaluate Vendor Invoice
You will then receive an invoice that will request vendor payment. The vendor invoice contains information regarding the services or goods sold, their respective costs, payment terms, and contact info. Pay attention to their details.
- Process Vendor Invoice
Enter the realm of invoice processing, a meticulous dance of scrutiny and accuracy. Invoice processing consists of validating the invoice against the purchase order and receipts. Check for discrepancies and resolve any issues promptly, for accuracy.
- Approve and Pay
Once the invoice is verified and approved, it's time to make the much-anticipated payment. Update your records and prepare your resources, be it checks, electronic payments, or direct deposit. Fulfill your financial obligations, ensuring timely and accurate invoice payments to maintain healthy vendor relationships. After making the vendor payment, you’ll record how the debit decreased the liability by the amount paid.
Accounts Payable Turnover Ratio
The accounts payable turnover ratio is a ratio used to show how frequently a company pays its accounts payable. This ratio can decrease or increase over a period, with different meanings in both cases.
Decreasing accounts payable turnover ratio shows that a small business:
Increasing accounts payable turnover ratio shows that a small business:
While an increasing accounts payable turnover appears to be a great sign, there are other things you’ll need to know about this ratio. Short-term increasing turnover ratios are a good indicator that a small business can sustain its financial stability.
However, if a small business has an increasing turnover ratio for several periods, it could have some consequences. Small businesses in this situation may not be reinvesting their funding back into their businesses. This may cause a small business to have a lower growth rate and fewer earnings over time.
AP Aging Schedule
Aging schedules help small businesses see their accounts payable in a more detailed manner. Small businesses can organize the accounts from:
How to Handle Accounts Payable
There are a few ways to handle accounts payable for the best results.
Use Electronic Invoicing
Electronic invoicing (also known as e-invoicing) is a way that you can send bills online rather than sending paper-based invoices. By using electronic invoicing, you’ll have a few advantages:
Have a Buffer
A buffer in your accounts payable serves as an emergency fund, but for accounts payable. Having money on hand to pay for accounts payable will ensure you don’t have any late payments.
Log into Your Calendar
Finally, you’ll want to log in the payment information into a calendar. This will ensure that you won’t forget the due dates and the amount paid.
You’ll want to make notes of the details, such as when a payment is due, to whom it is due, and when it’s due.
Is Accounts Payable an Expense?
Accounts payable isn’t an expense. Accounts payable is a liability, which is what a small business owes but hasn’t paid.
Expenses are costs a small business pays to create revenue.
The Importance of Accounts Payable
There are several benefits of accounts payable that you should be aware of:
Let Us Help You with Your Bookkeeping Needs
While operating a small business has a lot of needs, it shouldn’t be stressful. We’re here to help you with bookkeeping for small businesses. Work with a small business tax accountant from 1-800Accountant to make sure your bookkeeping needs are handled accurately.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.