Do you purchase goods or services for your business? Silly question: Of course you do. And, you might not always pay for the items up front. Instead, a vendor sends an invoice. If you receive invoices, you need to manage your accounts payable. What is accounts payable?
What is accounts payable?
Accounts payable, also referred to as payables or AP, is the money you owe to vendors. You increase your accounts payable when a vendor extends credit to you—aka you purchase something and don’t immediately pay. Track your AP using an accounts payable account. The entries in your accounts payable account are called payables. A payable represents an invoice you need to pay.
Let’s say you buy supplies from a vendor on credit. The vendor then sends you an invoice with a due date for the payment. The AP account in your books shows you which vendors you owe money to.
Record payables if you use accrual accounting. Under accrual accounting, record expenses when you incur them. That means you record an expense as soon as you receive an invoice, not just when you pay the vendor.
Knowing your business’s AP helps you determine if you are profitable. And, accounts payable provides data for budgeting and planning.
By looking ahead at expenses, you can decide when to make large purchases or if you are ready to expand. You can also avoid situations where you do not have enough cash on hand to cover costs.
What type of account is accounts payable?
Invoices generally require payments within 30, 60, or 90 days. As a result, AP is a short-term liability (i.e., a type of liability you pay within one year).
Record accounts payable in your liability account.
Accounts payable and accounts receivable
So far, we’ve talked about AP. It’s only fair we bring up its other half, accounts receivable.
Accounts receivable is money owed to you. Again, AP is money you owe.
When you have an accounts payable, your vendor has an accounts receivable. Likewise, when you have an accounts receivable, your customer has an accounts payable.
Accounts payable aging report
You can use an accounts payable aging report to organize the money you owe to vendors. An accounts payable aging report shows you:
What you owe Who you owe it to How old the invoice is (e.g., current or past due)
Here’s an example AP aging report:
Payee Current Past Due 1 – 30 Days Past Due 31 – 60 Days Total Office Mart $373.28 $373.28 Heating Pros $155.28 $155.28 JB Enterprises $194.61 $194.61 Bell $278 $278 Lighting Express $63.72 $63.72 Paper Supply $53.99 $53.99 Total $723.17 $341.72 $53.99 $1,118.88
List the vendors you owe money to in the first column. Enter the balances due to each vendor in the appropriate aging column (e.g., past due 31 – 60 days). If you don’t pay an invoice before it becomes past due, move the amount into the correct column. That way, you can see how much of your AP is overdue.
Creating an accounts payable journal entry
You need to record AP transactions in your accounting books using double-entry bookkeeping.
For every business transaction, record two entries. The accounts payable entries balance your books. While one entry increasesContinue reading