Accounts payable is one of the most important account categories that managers and executives should monitor to avoid budget snags. Accounting has a language all its own, and it is important to understand the terminology to process data entries correctly and accurately. The system of entering debits and credits is based on accounts management. Some of these accounts are fundamental to the bookkeeping and accounting process while others may be custom categories to fit the unique requirements of the business.
Defining Accounts Payable
This account is a record of all of the business’ current and ongoing expenses. These expenses may include may include short-term debts with a defined payment deadline to avoid interest payments or default proceedings. This account falls under current liabilities, which are typically payments due in one year from the date incurred.
The sum total of this account at any given time typically represents what the company owes its vendors and suppliers for goods or services bought that were purchased under a credit agreement. For comparison, accrued expenses refer to liabilities pertaining to goods and services already received but not yet billed while AP entries are recorded on the balance sheet when the business buys goods or services on credit. Accrued expenses are recognized on the balance sheet only at the end of the accounting period.
Create ledger entries for amounts due to suppliers under the AP account, which should be under the column for current liabilities. When businesses have too many entries to make because of a large number of suppliers, it is helpful to create a sub-ledger specifically for AP entries. Depending on the scope of your operation , several sub-ledgers may be used. Enter the subtotal figures in the general ledger to create a more organized record that is easy to browse and analyze for busy executives. If your company uses an electronic records system, as most businesses do, make sure that any AP sub-ledger created is linked to the general ledger entries as drop-down, expandable or click-through options.
Nature of Trade Payables
In accounting, short and long-term payables are considered cash sources since these accounts represent borrowed funds from suppliers that provide the goods or services without requiring upfront payments. When payments are made, it is a negative cash flow for the company making the payment. It is in the company’s interest to push for longer payment terms while suppliers prefer shorter payment deadlines. Failure to make payments as agreed may lead to revocation of the credit line, and suppliers may refuse to make further deliveries until payables are updated.
Transactional Accounts Management
Payable and receivable accounts are considered transactional accounts. Many businesses have found that streamlining the management of these accounts have led to savings on operational costs. These accounts are easily outsourced to bookkeeping and accounting firms so that the business can focus on its core concerns. The outsourcing strategy works very well for companies that customarily work with a long list of vendors and suppliers.
Managing accounts payable is crucial to ensuring the viability of a business. These short-term liabilities affect cash flow, inventory levels and the business’ ability to stay afloat. Develop a system to track entries in this account, giving due attention to credit terms, default conditions, vendor history and negotiability of account terms.