Understanding Accounts Payable
Accounts payable is a section of your accounting system. You can use it to:
- Record bills as they come in: Include who they are from, total amount and date due
- Record amounts that you are expecting to be billed for: When you order from a supplier, you might enter the amount due into accounts payable
- Track regular, repeat payments: These can include subscriptions or memberships
- Understand when payments are due: Use this system to remind you to make payments
On May 1, a bill comes in to your business, Blue Widget Co. from your materials supplier, Proper Plastic Perfection. The bill is for $2,800 and is due to be paid within 30 days. You enter the bill into accounts payable, with a reminder to pay the bill on May 31. When May 31 arrives, you pay the bill, which removes it from accounts payable.
Here are a few important points to understand about accounts payable:
It’s Not for Amounts You Pay Immediately
You only use accounts payable if you receive goods or services that you haven’t paid for yet. If you pay right away, there’s no need to record anything in accounts payable — although you will of course want to make a note of the expense elsewhere in your accounting system.
It’s Only for Short-term Debts
You don’t use accounts payable to show longer-term debts. Accounts payable is for bills you have that are due to be paid over a fairly short timescale.
The Total of Your Accounts Payable Debt Impacts Your Business Liabilities
Businesses typically have three main areas of their balance sheet:
- Assets: The amount of money currently in the business
- Credits: The amount of money you are owed by others (uncollected revenue), also known as “accounts receivable”
- Liabilities: The amount of money you owe to others
The liabilities section of your balance sheet is where the total amount of debt in accounts payable will be recorded.
Your Accounts Payable Is Another Company’s Accounts Receivable
The opposite of accounts payable is accounts receivable. That’s where businesses record the money they are owed from others. When a business sends a bill out, it is added to their accounts receivable as money they’re expecting to get. When it arrives at your business, you enter it as accounts payable. The same thing happens in reverse when you send a bill or invoice to someone else.
Paying Bills Removes Them From Accounts Payable
Accounts payable only shows your outstanding debts. When you pay a bill, it is removed from accounts payable and becomes a recorded expense elsewhere in your accounting system.