What Are Accounts Payable? 2023 Guide By Accounting Experts

Accounts Payable, or AP, is crucial to how companies manage their money. It’s like having a special list that keeps track of all the money they owe to different people and businesses. But what are accounts payable exactly?

A balance sheet shows the money a company owes to others, known as “current liabilities.” The AP department inside the company manages these payments to suppliers and helpers, ensuring timely repayments. Keep reading to explore the world of accounts payable and know how it works. 

What Are Accounts Payable?

Accounts Payable refers to a business’s debts to suppliers for purchases made on credit. It includes amounts due within a year. Knowing the accounts payable definition will help you grasp a business’s debts to suppliers for purchases made on credit, which can also refer to the department handling these expenses. 

AP shows the balance of accounts payable on the balance sheet. Meanwhile, changes in AP occur in the cash flow statement. 

If you want to protect cash and assets, monitoring AP payments and maintaining internal controls is crucial. Outsourced Accounting Services can help streamline the accounts payable process. Moreover, they ensure accurate payments and boost the bottom line. 

Now let’s head to the next part to understand accounts payable better. 

Understanding Accounts Payable 

Regarding managing finances, several vital terms often arise Accounts Payable, Trade Payables, and Accounts Receivable. It would help if you explored the distinctions between those concepts.  Whether you’re a beginner or looking to enhance your knowledge, we will equip you with these basic aspects of AP management.

1. Accounts Payable vs. Trade Payables

Managing a company’s finances involves handling various payments and tasks. You must discern accounts payable and trade payables to succeed in this field. Although they may sound similar, they have distinct meanings.

• Trade payables: Imagine you have a business where you sell various products. When you buy goods from suppliers to stock your store, you owe them money. These unpaid bills for the items you’ve purchased are trade payables. It’s like borrowing money to have the products you need to run your business.
• Accounts payable: It is a broader term. It includes all the company’s short-term debts, not just those related to stock. This word covers various expenses that a business needs to pay—for example, bills for services like rent, utilities, advertising, or repairs.

Knowing the differences between accounts payable and trade payables helps you manage your business’s finances better. By keeping track of these tasks separately, you will be sure you have enough funds to pay your suppliers on time. That’s how you maintain a healthy financial status for your business. 

See more: How To Find Accounts Payable?

2. Account Payable vs. Account Receivable

Beside Accounts Payable and Trade Payables, Accounts receivable is another term you must know. These terms will help businesses manage their money correctly. Here are the differences between these two: 

• Accounts payable: This term involves the money a firm owes its vendors, indicating its liabilities. It highlights the company’s outstanding debts. By monitoring accounts payable, companies can ensure timely payment to vendors, maintain positive relationships, and avoid penalties or disruptions in the supply chain. 
• Accounts receivable: This term refers to the money owed to a company by its customers, representing its assets. It emphasizes the company’s expected incoming payments. Monitoring accounts receivable enables companies to track and collect customer payments on time, ensuring a steady cash flow and reducing the risk of bad debts.

See more: What Are Difference Between Account Payable And Note Payable?

What Is The Process Of Accounts Payable?

The accounts payable process involves efficiently handling a company’s financial responsibilities towards its creditors and vendors. This end-to-end process consists of four essential steps:

1. Invoice capture: Manual invoice data entry (vendor details, line items, amounts, and GL coding) into a record-keeping system. Risks related to accuracy and human errors may happen during this data entry phase.
2. Invoice approval: This step reviews and approves supplier invoices, records costs in the ERP system, and initiates payment. The AP team often moves paper invoices physically to get the required permissions. 
3. Payment authorization: AP team permits payment of approved invoices. They will choose the payment date, method, and amount.
4. Payment execution: The company makes the actual payment to the vendor and gives remittance details. It may involve checking, printing, signing, mailing, automated clearing house (ACH) with the bank, or completing credit card payments.

After you pay, the invoice will be marked as finished and stored in the correct location. It’s crucial to streamline the accounts payable process. We will be able to reduce risks and enhance efficiency. 

Automated systems or outsourcing to trusted accounts payable service providers can reduce errors. This option also ensures accurate financial management and improves overall function. 

When companies effectively handle accounts payable processes, they can keep good relationships with the people they owe money to and the suppliers they buy from. It aids them to make the most of their money.

How Do Accounts Payable Help Businesses?

Now you know the accounts payable definition and its process, let’s dive into how it helps businesses. AP management is a worthy investment for several reasons:

• Save money: When companies use automated accounts payable systems, they spend less on workers because the system does much of the work and also avoids paying for mistakes like duplicate invoices or late fees.
• Manage money better: Automated systems help companies plan how much money they need and when to pay their bills. They can see all the invoices, pay them on time, and get discounts for paying early.
• Make relationships with suppliers: Accounts payable is about keeping good relationships with the people and companies providing goods and services. 
• See everything clearly: Automated systems keep track of all the invoices and who is responsible for them. Everyone will know what’s happening and fix any problems quickly. People can access this info on their computers or even on their phones.
• Be more efficient: Automated systems have rules and checks to know everything is going correctly, allowing firms to avoid mistakes, delays, and unnecessary costs by following the essential rules and laws.
• Be ready for change: Automated systems handle more work without needing more people. They can also adapt to new situations, like when companies merge or do business with new partners. It helps the company stay flexible and efficient.

See more: 3-Way Match For Account Payable: Definition And How It Works In 2023

Frequently Asked Questions

What are examples of account payables?

Here are some accounts payable examples to help you know this term better: 

• Cleaning services: Imagine Company A hires Company B to clean its office. Company A has to pay Company B regularly for their excellent cleaning work.
• Staff uniforms: Sometimes, a business asks another business to make uniforms for its employees. When the business needs new uniforms or if some get lost or damaged, they order more from the other business and pay them for it.
• Office supplies: Many companies buy lots of office supplies at once and call more automatically when they start running out. They owe money to the office supply company for these supplies.
• Sanitation: Some businesses pay other businesses to take away their garbage and recycle it. It usually happens every week, and the firm has to pay for this service.

These accounts payable examples show the different kinds of things a company may need to pay for and keep track of as part of their accounts payable.

What is an account payable in simple terms?

Accounts payable is like a special list of things a company needs to pay for. It includes bills for something they bought or services they used but have yet to pay. 

The company must keep track of these bills and pay them on time. Like you have a list of toys you want to buy, companies have a list of things they must pay for.

What is the role of the accounts payable?

Accounts payable is like a team of money detectives for a company:

• They make a special list of everything the company needs to pay for, like supplies, rent, or services.
• Their vital job is to ensure the company pays all the bills on time.
• This helps the company keep its promises and stay friends with the people they owe money.

To sum it up, what are accounts payable? It means a company must pay money to the people they buy things from. It’s like when you owe money to someone after purchasing something from them. 

Businesses must keep track of these payments to remember to pay them on time. Knowing accounts payable helps companies to be responsible with their money and maintain good relationships with the people they owe.