As part of OnlineAdvisor’s efforts to educate, inform and encourage business leaders, we present key financial terms and concepts. The concept of accounts payable is an important area of financial management. Let's cover the details of what it is and what it means.
Accounts payable is an accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. Here is the simple explanation: accounts payable includes all of the unpaid bills and invoices which will be paid within a year.
On many balance sheets, this entry appears under the heading of “current liabilities“. Another common usage refers to a business department or division that is responsible for making payments owed by the company to suppliers and other creditors.
For example, if you ordered a load of widgets for your company and didn’t pay the full invoice amount at the time you ordered them, the amount of the invoice would show on your accounting as a balance in your accounts payable.
There may be some very good reasons for not paying right away. You may be ordering more widgets days later or you are waiting for payment from your client. Waiting to pay the invoice may be easier and more streamlined for your business and its cash flow.
Regardless of the reason, this is a common practice within the business world. It also gives some relief for businesses and their cash flow in strategic circumstances.
Accounts Receivable and Accounts Payable
Accounts receivables and accounts payable are essentially opposite of each other. It categorizes the money a company owes its vendors. Accounts receivables represent the money that is owed to a company. If a company has a bill in its accounts payable department, the company it owes the funds categorizes the bill in its accounts receivables department.