Accounts payable is a term you might see in your accounting software or hear muttered amongst financial specialists. Ever wondered what it means? This guide shows you all you need to know about the term.
What are accounts payable?
When buying goods and services from a supplier or on credit requiring payment in a short time, the accounting entry is Accounts Payable (AP).
On a balance sheet, it appears under current liabilities. An AP department is responsible for making payments owed by the company to suppliers and other creditors. You are basically paying money currently owed.
There are many types of payables which a business may have on its balance sheet under current liabilities. These are often short-term financial commitments.
Here are a handful of accounts payable examples:
- Business travel expenses. Business that require staff to travel may have their AP department manage their travel expenses. This could include train tickets, flights, hotel bookings and hospitality costs. After business travel has taken place, AP would be responsible for settling funds distributed versus funds actually spent or for processing travel reimbursement.
- Internal payments. Accounts payable is responsible for distributing internal reimbursement and controlling and administering petty cash. Again, this is for short-term payments that needs resolving quickly. •
- Subcontracting. Businesses partnering with another for contractors often use accounts payable. The subcontracting work will take place on the basis that the company will pay the other for the work.
- Equipment. Leasing equipment is usually covered by accounts payable.
The process is fairly simple, and usually involves the bill being received for any of the above examples or another situation. AP will then review the bill and make sure it matches the agreed price and payment terms.
Ledger accounts need to be updated based on the received bills and an expense entry is usually required.
Managerial approval is sometimes required depending on the company’s policy. Finally, all bills are settled within the agreed term.
Failure to meet the agreed payment date can often cause problems and create conflict. Putting checks and procedures in place ensures invoices being paid correctly, on time and not duplicated.
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