Accounts Payable is an account that is used by businesses to track amounts they owe to vendors who allow them to pay by invoice with terms of 30 days or more. When a company purchases products on these terms, they receive an invoice from the vendor. The bookkeeper then enters that invoice into the bookkeeping system.
Accounts Payable is used even if a business operates on a cash basis rather than an accrual basis. The difference is that a business which does it’s accounting on a cash basis will not see amounts owed to a business on its balance sheet. Nor will those amounts appear on a Profit and Loss statement as expenses because they have yet to be paid. This is because cash basis accounting only accounts for costs or expenses when they have been paid, not when they have been billed as in the accrual method.
From this account, an Accounts Payable aging statement is produced, showing how much the business owes its vendors at any time. The statement is usually broken down into columns of 30 day increments with a ‘Current’ column, a ‘1-30 day’ column, a ’31-60 day’ column and a ’61-90 day’ column and a ‘>90 day’ column.
Some companies are large enough that there is a separate department for Accounts Payable. Others are small enough that it is managed by the bookkeeper or business owner. Either way, it is an important account to use for businesses that purchase on credit terms because it ensures accounts are kept current. It also means that the bookkeeper doesn’t have to wait until an invoice is paid to enter it into the bookkeeping software. They can record it as in invoice in QuickBooks for example and when the payment is made, they can use the ‘Pay Bills’ feature of the software to record payment of the invoice.
This account is the opposite of Accounts Receivable. One company’s receivable is another company’s payable. Accounts Payable can be reconciled in much the same way a checking account is reconciled. Businesses normally issue statements to its customers on a monthly basis showing the current and past due amounts owed. The bookkeeper can use these statements to compare with the invoices he/she has entered into the books to be sure they match. If both businesses keep records properly, it will be easier for them both to find and fix errors.
Keeping up to date with Accounts Payable will help a business avoid late payments and finance charges. Some vendors even give a discount to businesses that pay early. This is something to keep in mind since over the course of a year it could save a lot of money. This is an example of how keeping the books current and correctly can help a business financially whereas neglecting the bookkeeping will in the long term cost a business unnecessarily.