Accounts payable is a business term which means when a company purchases goods on credit which they are expected to pay back the money in a short period of time. Accounts payable is treated as a liability in the balance sheet under the head ‘current liabilities’. Accounts Payable is also referred to as a short-term debt owed by a business to outsiders which needs to be paid to avoid default.
Accounts Payable is a liability because the business orders goods or services without paying in cash up front, meaning that the goods were bought on credit. The business becomes Creditor as a result of accounts payable.
Accounts Payable is not limited to companies alone, even individuals also have Accounts Payable.
As individuals, we consume electricity, telephone, broadband and cable TV network. The service provider generate bills towards the end of the month or a particular billing period. This means that the service provider rendered you some service and sends the bill which is supposed to be paid on or before a certain date or else you will default and lose the services you were enjoying. This becomes Accounts Payable to individuals.
We are also going to look at accounts payable from the angle of a company. Let us assume that you are a company X who purchases goods on credit from company Y. The amount of debt which has been accumulated needs to be paid back in 30 days.
In his books of account, company Y will record the same sale to customer X as accounts receivable while company A will record the purchase as accounts payable. This is very important because company X purchased the goods on credit and has to pay company Y.
Under the accural accounting methodology, this will be treated as a sale even though there is no cash payment yet. The accountants at the accounts department needs to be very careful while processing transactions which has to do with Accounts Payable.
Finally, time is the essence considering in accounts payable. it is a short term debt which needs to be paid within a given period of time. Along with that accuracy is the key, which involves the amount that needs to be paid along with the name of the supplier. Accuracy is important because it will impact the cash position of the company.
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