Accounts Payable

 

What is Accounts Payable?
Accounts payable is the money that a business owes to others for goods or services it has received but has not yet paid for. It’s like an entity’s short term debts or obligations. When looking at an entity’s balance sheet, which is a financial statement showing its assets, liabilities, and equity at a particular point in time, the accounts payable is listed there.

In the category of Accounts Payable various expenses are included like utility bills, rent, payments to vendors or contractors, and other regular operating costs. So, if an entity has received goods or services but hasn’t paid for them yet, those amounts would be recorded under accounts payable.

The accounts payable department or person is responsible for managing all these outstanding obligations. They keep track of what needs to be paid, record them in the accounts payable section of the balance sheet, and ensure that payments are processed in a timely manner. Essentially, they’re in charge of making sure the entity meets its financial obligations to others.

Under AASB 101, accounts payable must be classified appropriately in the financial statements, ensuring clarity between short term and long term liabilities.

The impact of accounts payable on an entity’s cash flow is highlighted in AASB 107, which mandates the reporting of cash movements related to operational activities.

Accounts Payables Process

The accounts payable process is an structured way for an entity to manage its outstanding debts to vendors or suppliers. Here‘s how it typically works:

Purchase Order or Contract
The process starts when an entity needs to procure goods or services. This could involve submitting a purchase order or signing a contract with a vendor outlining the terms of the transaction.

Invoice Submission
Once the goods or services are delivered, the vendor sends an invoice to the accounts payable department detailing the items provided and the amount owed.

Recording the Invoice
The accounts payable department then records the invoice amount as a liability in the entity‘s accounting system, typically crediting the accounts payable account.

Approval Process
Before payment can be made, the invoice needs approval from the appropriate authority, such as the business owner or CFO, to ensure that the expense is valid and authorised.

Payment Processing
Once approval is obtained, the accounts payable department processes the payment to the vendor, usually by issuing a cheque, initiating a bank transfer, or using another approved payment method. The accounts payable account is then debited to reflect the reduction in the entity‘s liabilities.

Balancing Accounts Payable
Throughout this process, the accounts payable balance represents the total amount owed by the entity to its vendors. It‘s important to note that accounts payable is recorded as a positive number because it represents a liability. For example, if the accounts payable balance is $5,000, it means the entity owes $5,000 to its creditors.

Rare Cases of Negative Balances
While it‘s uncommon, a negative accounts payable balance could occur if the entity overpaid a vendor or supplier and is owed money in return. However, this situation is not typical in regular business operations.

Accounts Payable vs Accounts Receivable

Under the accrual accounting method, accounts payable and accounts receivable work together to manage cash flows and provide insights into an entity’s overall financial health.

Accounts Payable: Accounts payable tracks the money that a business owes to its suppliers, vendors, or creditors for goods or services received but not yet paid for. This information is recorded on the balance sheet and reflects the entity’s short term liabilities. For instance, expenses like rent, utility bills, software licences, and membership fees fall under accounts payable.

Accounts Receivable: In contrast, accounts receivable tracks the money owed to a business by its clients or customers for goods or services provided on credit. Until payment is received, these transactions are recorded as accounts receivable on the balance sheet. Once payment is made, the accounts receivable balance is decreased by debiting the account, and the revenue account is credited to reflect the income earned.

Accounts Payable vs Trade Payables

Accounts payable and trade payables are sometimes used interchangeably, but they represent different aspects of an entity’s financial obligations:

Accounts Payable: This is a broader term encompassing all of an entity’s outstanding debts, including expenses like rent, utilities, and software licences, in addition to payments owed for inventory purchases.

Trade Payables: Trade payables specifically refer to the amounts owed for the purchase of goods or inventory items used in the production or sale of goods. For example, it includes expenses like raw materials for manufacturing or office supplies for day to day operations.

In essence, accounts payable serves as an umbrella term covering all outstanding debts, while trade payables represent a subset of accounts payable that pertains specifically to payments owed for inventory related transactions.

Understanding these distinctions helps companies effectively manage their financial obligations and maintain a clear view of their liquidity position.

This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.