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. Here’s what you should know about accounts payable.
What is Accounts Payable?
Accounts payable is a short-term debt and a liability. It tracks what a small business owes, and it also tracks the creditors you’ll send payments to.
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 liability on the balance sheet, which is what a business owes but has yet to pay. You’ll find accounts payable under the current liabilities section of a balance sheet.
Accounts Payable Process
The accounts payable process has four steps, explained below.
Receive a Bill
The first step of the accounts payable process is to receive a bill. You’ll record it as a credit since it will increase your liabilities.
Next, you’ll review the bill and note its details. You’ll need to have the purchase order, which contains details about your bill and who to send it to.
Third, you’ll update your records. Before paying your bill and noting it as a debit, make sure your records are accurate and that you have the approval to pay.
Pay on Time
Finally, you should pay the debts owed on time. After making payments for the accounts payable, you’ll record how the debit decreased the liability by the amount paid.
Accounts Payable Turnover Ratio
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.
A decreasing accounts payable turnover ratio shows that a small business:
- Has or is working with different payment arrangements with suppliers
- Is taking longer to pay off its suppliers compared to previous periods
- Is or may be in financial distress
An increasing accounts payable turnover ratio shows that a small business:
- Has enough cash to pay off its debts
- Is managing its cash flow and debts effectively.
- Is paying off suppliers at a faster pace compared to previous periods.
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:
- Current (under 30 days)
- 1-30 days past due
- 30-60 days past due
- 60-90 days past due
- More than 90 days past due
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:
- You can print or reproduce e-invoices when needed
- You can receive or send e-invoices faster for business use and data collection purposes
- You’ll be able to search and sort for dates, names, and terms within invoices
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 the accounts payable payments will ensure that you can pay bills due on time.
Use Purchase Orders
Purchase orders are documents that the buyer issues so that the seller knows payment will arrive for a product or service. This allows buyers to place orders without payments immediately due.
Log in 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.
Why is Accounts Payable Important?
Accounts payable is important for several reasons, but especially if it decreases or increases over time.
If the accounts payable increases over time, it means your business is purchasing goods or services on credit instead of using cash.
If the accounts payable decreases over time, it means your business is paying debts faster than it’s purchasing new items using credit.
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 your bookkeeping needs. Work with the professionals at 1-800Accountant to make sure your bookkeeping needs are handled properly.
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.