What is accounts payable?
To start this discussion off, allow me to first explain what accounts payable is. In the most basic use of the term, accounts payable represents a currently liability for goods already purchased and received, or for services already rendered, for which funds are owed.
For example, the accounts payable for a furniture store could be the amount owed to a supplier for a desk purchased on credit for sale. By purchasing on credit, the furniture store creates an account for the amount they owe. They are obligated to make that payment.
On the flip-side we have accounts receivable. Accounts receivable represents money owed to you. For example, the supplier is owed money by the furniture store for the desk. Accounts receivable can establish protocol where customers may not have to pay until a later date.
There is an important distinction to be made between accounts payable and accounts receivable, because they represent the direction of a cash-flow either in or out of your organization. Accounts receivable = IN. Accounts payable = OUT.
Why do we use accounts payable?
Imagine being brought on as an accountant for a company, but they have never recorded nor recognized any money they owe. This creates an accounting nightmare because they don’t know how much money they owe.
An organization needs to know how much money they owe because they need to know what their future cash flow will look like. Knowing what their future cash flow will look like will allow them to better plan for their future transactions. Also, when a supplier invoices demanding payment, an organization will not be surprised.