What is Accounts Payable?
When a company purchases goods on credit which needs to be paid back in a short period of time, it is known as Accounts Payable It is treated as a liability and comes under the head ‘current liabilities’. Accounts Payable is a short-term debt payment which needs to be paid to avoid default.
Accounts payable (AP) is money owed by a business to its suppliers shown as a liability on a company’s balance sheet. It is distinct from notes payable liabilities, which are debts created by formal legal instrument documents.
Accounts payable is recorded in the Account Payable sub-ledger at the time an invoice is vouched for payment. Vouchered, or vouched, means that an invoice is approved for payment and has been recorded in General Ledger or AP sub-ledger as an outstanding, or open, liability because it has not been paid.
Payables are often categorized as Trade Payables, payables for the purchase of physical goods that are recorded in Inventory, and Expense Payables, payables for the purchase of goods or services that are expensed. Common examples of Expense Payables are advertising, travel, entertainment, office supplies and utilities.
AP is a form of credit that suppliers offer to their customers by allowing them to pay for a product or service after it has already been received. Suppliers offer various payment terms for an invoice. Payment terms may include the offer of a cash discount for paying an invoice within a defined number of days.
Tracking your accounts payable services is a critical component to cash flow management. As your business grows, you may be spending money on different services for your business and you will receive invoices that need to get paid. If you can’t manage your debts, you could find yourself in a cash crunch, or worse, defaulting on a debt.
Especially when you are growing quickly, you may need to buy more inventory and invest in business expansion at a faster rate than your customers are paying you. This means that you will have bills that come due before you receive money from your customers.
To stay on top of a situation like this, you need to keep track of your accounts payable and make sure that you have enough cash on hand to continue paying your bills. Ideally, you should forecast your sales and cash flow to make sure that you plan to have enough cash to cover the costs of growth.
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