Accounts payable is a detailed list of a company's debt and liability owed from the purchase of services and goods. Receiving goods without payment and buying goods on credit are both recorded as accounts payable, too. Accounts payable is also known as trades payables. Basically, accounts payable is the liability to a creditor. Staff payroll and leases are not a part of accounts payable. Accounts payable is like having a credit balance to work with. When done right, accounts payable should reflect a credit balance that is equal to the outstanding vendor invoices.
Accounts Payable and Accrual Accounting
Accounts payable is only done in companies that are on an accrual-based accounting system and not a cash system. A cash system is money being recorded in-and-out of the account. An accrual-based system is money carried out over some time. Household accounts must be paid within a certain period to prevent the discontinuation of services. For example, a university uses accounts payable with vendors that supply them with goods and services. Some companies even have a specific department of employees to streamline the process of accounts payable. This department takes care of the crediting and debiting of accounts payable.
Creating Accounts Payable
Accounts payable is a ledger. The finance department creates records of the money received on the invoice and the money payable to a creditor. An accurate audit trail is needed for an accounts payable ledger. An audit trail is a recording of every transaction that includes goods and services. Accounts payable states the vendor's name, account number, invoice number, expense type, invoice receipt date, payment deadline, and status. It's the audit trail that allows a company to track everything. Several documents are tracked and recorded with accounts payable. These include supplier and vendor invoices, purchase orders, agreements with vendors or independent contractors, and contracts. Universities that used independent contracts must get a W9 form to properly fill out the accounts payable ledger. Independent contractors may send university invoices for things like office supplies and other materials. Keep in mind that accounts payable does not include any legal instruments or legal documents.
Why Accounts Payable is so Important
You may be wondering to yourself why are accounts payable so important? Well first of all, if you don't know what's going on with your business financially, you won't be able to make good business decisions and you need to make good business decisions to stay afloat. Besides, if you don't pay your bills on time, it will crush your reputation among both customers and vendors or independent contractors. Mismanaging your company's money and responsibilities is a surefire way to lose your reputation and lose money. You will wind up having some serious problems. When you manage your accounts payable properly, you wind up with more money and more opportunities down the road. It's all about trust in the world of business.
If you're unsure about how to manage your accounts payable, consider investing in a specific software program to get yourself started and on the right track. Another option is to hire a financial expert to do it for you.