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Accounts payable (sometimes abbreviated AP) is an account that includes all of a company’s debt obligations to creditors and suppliers in the short-term. It’s also used to refer to the specific department in a company that is responsible for tracking these debts and making payments on them.
When a company has received goods or services, but hasn’t yet paid for them, those owed payments are counted in accounts payable. When a business adds together all of these owed amounts, the resulting figure is called the accounts payable balance and is featured on a company’s balance sheet. This figure also factors into a company’s cash flow statement, where the increase or decrease in accounts payable balance from one period to the next is shown.
A company’s cash flow situation often partially dictates when it pays debts listed in accounts payable. If the company needs to improve its cash flow, leadership may choose to wait until the latest possible due date to pay outstanding bills so that they have access to as many funds as they can for as long as they can.
If debts in accounts payable aren’t paid in the period listed in accounts payable, they will go into default. Generally, an entry in accounts payable for one company means there’s a matched entry in accounts receivable for another company—the one owed a debt by the first for goods or services that have been delivered.
Measuring changes in accounts payable over time is an important way for businesses to gain insights into their finances. An increase of accounts payable from one period to the next means that the company is paying for less things with funds on hand and more with credit. A decrease in accounts payable means that a company is paying owed debts more quickly, or paying money for more of the goods and services they receive.
Staying on top of accounts payable is essential, because failing to account for accounts payable can cause a company to have an inflated idea of its own cash flow. While a business may have plenty of funds in the bank, their accounts payable may mean that much of that cash will be gone within a year to pay off owed debts.
Accounts payable often also involves a balance between a company’s cash flow and its relationship with vendors and suppliers. While waiting until the last moment to pay debts may temporarily improve a company’s cash flow, it might negatively impact their relationship with suppliers and creditors.
The term ‘trade payables’ is sometimes thought to simply be another name for accounts payable, but the two represent slightly different figures. Trade payables relate to debts owed to vendors for goods specifically connected to a company’s inventory, such as raw materials, supplies, etc. Accounts payable, on the other hand, counts for all of a company’s short-term debts, whether they’re related to inventory or not.
Basically, all trade payables are also accounts payable, but not all accounts payable are trade payables.
Accounts receivable are similar in their structure but opposites in terms of what they actually represent. While accounts receivable represents debts that are owed to a business, accounts payable represents debts owed by the company to supplier or other third parties.
Accounts payable are often managed by a department of the same name in larger companies. They’re not just responsible for the payment of invoices and bills, but also managing a range of other functions that often include but are not limited to:
Travel Expense: In some businesses, accounts payable is responsible for the handling of travel expenses for employees that must travel in support of the company’s objectives. This includes not only the financial aspects of travel, but also logistical concerns such as reservations, rentals, and itineraries.
After travel is complete, accounts payable will settle the difference between funds distributed for travel costs and how much is actually spent, as well as processing requests for reimbursement of costs personally incurred by employees during travel.
Internal Payments: Many employees temporarily take on costs associated with the business with the intention of being reimbursed for those expenses. These payments, as well as other related payments such as petty cash and sales tax exemptions, are managed by the accounts payable department.
Employees must submit receipts and reimbursement requests to accounts payable so that the department can then manage and track the reimbursement of funds to employees.
Payments to Vendors: Ongoing vendor relationships are managed through accounts payable, including their contact information, terms of payment, W-9 forms and tax info, and other data. While accounts payable departments don’t always handle purchase orders themselves, they will verify those purchases and keep detailed records of them for the company’s ledger.
Generally, the accounts payable process begins when a company receives a bill. The accounts payable department or person in charge will then review the bill’s details and confirm its accuracy, then update the accounts receivable records. Finally, the accounts receivable department is responsible for ensuring that the bill is paid before its due date.
Generally, well-run companies feature internal controls over their accounts payable department in order to prevent payments of inaccurate or fraudulent invoices, repeat payments, or misplaced/lost payments.
Accounts payable includes all of a company’s short-term credits that have been given to the company by vendors or creditors in exchange for already supplied goods or services. Accounts payable, as a department, also is in charge of handling internal payments to employees for business expenses as well as financing and organizing travel and petty cash disbursements.
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