“Accounts payable” (or AP) is a phrase that’s sure to be seen and heard in any company that does business. On a technical level accounts payable is the comprehensive list, a record of a company’s liability in the form of payments owed to others. Many medium and large-sized businesses do their purchasing and receiving on a level where the date a contractor delivers products or services won’t be the same day that the contractor gets paid.
Some real-world examples of accounts payable include the amounts owed for all the goods or services received without having yet paid for them. Whenever a large grocery chain or a retailer receives a supply of product on credit, that amount owed will be listed in the accounts payable ledger. If a company receives $10,000 worth of new computers, then the $10,000 outstanding amount is debited as a liability while $10,000 is also credited as a technology expense. In a nutshell, accounts payable is a liability—it’s the amount of money owed to suppliers and service providers that the company will have to pay sooner or later.
As a liability, accounts payable has a credit line that matches the balance owed. Similar to how credit cards work, the cardholder spends the credit card company’s money on the agreement that the money will be paid back in full. Therefore, at the end of the ledger, the total liabilities in amounts owed should equal the total amount of credit. The accounts must balance and the balance sheets should show a difference of zero.
Accounts payable and accrual accounting
Accounts payable works best in accrual-based accounting systems rather than on a strict cash basis. As stated earlier, many medium and large businesses trade on a level where there’s a constant flow of goods, services, and payments, and the three don’t always match up at the same time. Goods received on credit are another line in the accounts payable record. A payment made to a supplier represents the liability shrinking—at least until new goods or services are received and the liability grows again.
The best example of AP outside of accrual accounting systems is any modern household. Basic costs like rent (or property taxes) and utilities like water and energy must be paid for. Whatever the total amount owed for the utilities a household enjoyed last month is the accounts payable for the household. In these cash-based systems, not reconciling your AP for the last billing period will result in those utilities being shut off or in eviction. In accrual accounting, as used by some small and many medium and large businesses, the company making the purchases and the supplier will have a different arrangement and a different schedule for billing.
Accounts payable is more of a term seen in medium and large businesses than in small businesses and most households. Many companies have teams of accountants working day in and day out to maintain and resolve the balances from accounts payable. The often-heavy cost in payroll hours and hours for teams of accountants easily be slashed, and the accounting work streamlined, with the use of cutting edge procurement software.
The ideal procurement software will allow accountants and the appropriate company officers to especially track accounts payable. This includes not only the credit and liability, but real-time analysis of procurement spending against profits, other liabilities, and the company’s bottom line.
The accounts payable essentials
Most accountants already know what Procurify is talking about here, but we’ve found that in one company after another, different departments rarely communicate, so people hunting for the best and easiest accounting software might not know off the top of their head what to look for. These are the essentials for any accounts payable balance sheet.
Vendor name – Companies need to know which person or company to whom they owe money
Account number – This is usually the company’s billing account, while other accounts have other specific purposes
Invoice number – This is the most important information on the invoice other than the vendor name and billing amount
Expense type – Was it a technology expense? An office supply expense? A miscellaneous expense?
Invoice receipt date – the proper date is when the company received the goods or service, not whenever the vendor actually drafted the billing statement
Payment deadline – the last day to pay before problems occur
Status – whether or not the invoice has been paid, is still pending, whether it’s late, or being reviewed by the accounting or procurement departments
Trades payable and accounts receivable
“Trades payable” or “trade payables” is a term often used synonymously with accounts payable, but it’s actually a specific kind of accounts payable. Trade payables are the liability, or amounts owed, to vendors for products or services received. The more general term “accounts payable” represents all the company’s short-term outstanding debts, including trade payables. These other liabilities could include installment payments for business loans, tax revenues owed to governments, and payments on company credit cards.
Accounts receivable is very simply the opposite of accounts payable. AP represents a company’s short-term debts, while accounts receivable represents the money that is owed to that company. One example is the car lot that sells a fleet of trucks to a growing delivery company. The growing delivery company would record that expense under accounts payable while the car vendor would mark the money they theoretically made, but haven’t received yet, as accounts receivable.
AP for non-accountants
A lot of small businesses are experiencing wonderful growth, but they’re still not at that stage where hiring a team of expert accountants is even an option yet. Here are simple ways that the owners or managers of these growing underdog companies can create an accounts payable record.
First, every invoice, billing statement, and every other item in the accounts payable record should conform to a standard format and include all of the accounts payable essentials listed above: vendor name, account number, invoice number, expense type, invoice receipt date, payment deadline, and invoice status.
Accounts payable should be filed under the company’s general ledger under “liabilities.” Whenever the company receives an invoice, AP will be debited while the related expense account will be credited. To make accounts payable easier to maintain, resolve, and balance, AP tracks the following types of documents: purchase orders, invoices from vendors and suppliers, contracts and payment terms, and any other agreements with vendors and independent contractors.
Developing an automated AP program
Procurify has simple, user-friendly invoice templates that can be accessed through the software or saved as PDF files. Procurify’s accounts payable feature allows maximum flexibility to meet the requirements of your company’s unique accounting systems and processes, while also automating them. Setting up your company’s accounts payable with Procurify is now easier than ever.
Step 1 is to set up a chart of accounts, which is a general ledger tracking all the company’s liabilities in one convenient digital space.
Step 2 is the approval routing. Bills and other payments often need to be approved first, so setting up the approval process and giving the proper permissions to the designated approver is fast and easy.
Step 3 is to add all taxes that need to be tracked in the accounting system. This includes municipal, state, and federal taxes.
Step 4 is to set up a user profile and to add the Accounts Payable role to the designated bill approver or the accounting team members.
There are other accounts payable tasks that Procurify’s cutting-edge software lets you do easily and in as few steps as possible. These tasks include creating invoices and invoice templates, making and recording payments, making accrual reports, creating void checks, and tracking company spending.
Accounts payable is the record of a company’s short-term liabilities in the form of money owed. The most commonly understood type of accounts payable is trade payables, but trade payables only represent one type of liability in accounts payable. It’s the opposite of accounts receivable and works best on accrual accounting systems rather than on a strict receive-as-you-pay basis.
So why are accounts receivable important? The reasons are simple but equally and extremely important. First, it’s very important to track the money your company owed to vendors and independent contractors. The company needs their goods or services, and it’s only fair that they are justly paid for what they already provided. Second, responsible tracking of accounts payable ensures that companies can avoid late fines and taking hits to their credit score.
Best of all, responsible accounting prevents overpayment, it prevents fraud, and it ensures that companies keep the credibility needed to maintain professional working relationships with vendors and contractors.