What is Account Payable?

Difference Between Accounts Payable & Receivable

In order to understand your finances, you must learn the meaning of various jargons. One of the most common ones that you will come across in your balance sheet is accounts payable. What account is account payables and what does it imply?

What Does Account Payables Mean?

You will notice the term Accounts Payable in the current liabilities section of your balance sheet. It is a culmination of the debts that you need to pay off in a given period in order to avoid defaults and a negative impact on your credit history.

Now that you know what is account payables, the next thing to understand is its implications. At the corporate level, accounts payable is often a short-term pending payment or debt that occurs due to suppliers. When a company presents an IOU to another business entity or account, it is recorded in the ledger under the accounts payable section as short-term debt. This term is also used to refer to the department in the organisation that has the responsibility of clearing any payments to the suppliers or creditors.

When talking about what account is account payables, it is important to note that it reflects on the financial health of the organisation as well. If the accounts payable is constantly increasing, it shows that the company is purchasing goods and services using credit, instead of making cash payments.

On the other hand, when accounts payable decreases steadily, it shows that the debts are being paid at a faster rate while purchasing new services or goods on credit. This total sum of outstanding payments to suppliers or creditors is also essential in managing the cash flow of any business.

When preparing the cash flow statement for a company, the total decrease or increase in the accounts payable is recorded in the top section under the title, ‘cash flow from operating activities’. This figure can be used by the management to manipulate the cash flow of the business. For instance, if an organisation wishes to increase the cash reserves for a given period of time, they can extend the repayment term for all the outstanding recorded under AP.

Of course, they also need to weigh the ongoing relationship with suppliers and vendors when making the decision of extending the repayment period. It is always a healthy business practice to ensure that bills are cleared by the due date.

How is Account Payable Recorded?

Learning how to record account payable and account receivable is an important step in good financial management. In case of double entry bookkeeping, you need to make sure that every entry has a debit and credit record.

When recording accounts payable, an accountant credits it whenever an invoice or a bill is received. This credit record is offset with a debit record of an expense account for the services and goods that were purchased on credit. The debit record can also be that of an asset account if a capitalised asset was purchased in the transaction. Once the bill is cleared, the accounts payable record is debited in order to reduce the balance liability.

Difference Between Account Payable and Account Receivable

In order to ensure the best cash flow management, it is also important to know what is account receivable and how it is different from account payable. Account receivable is the opposite of account payable, as the name suggests. First, while account receivable is a liability, account payable is listed as an asset.

It is a very common practice for businesses, especially smaller businesses and startups, to make late payments to suppliers. In order to manage cash flow better and improve financial health, the difference between account payable and receivable and the relationship between the two plays a significant role.

If you have any outstanding liabilities, your balance sheet becomes challenging. It reflects that the company does not have enough capital to reduce debt or to invest in their growth. This is when knowing what is accounts receivable comes handy. It is the total amount of money that vendors or customers owe to your company. This asset is created when your organisation allows buyers to make credit purchases.

Both accounts payable and receivable need properly managed processes to keep the company financially healthy. Having a clear record of who owes your company money and how much liability you have built is the only way to understand the actual financial health of your organisation.

The difference between accounts payable and accounts receivable lies in the process. In case of accounts payable, you need to maintain the invoices sent by your suppliers while you have to send out invoices to vendors and suppliers as the first step of accounts receivable. When the latter increases steadily, it shows that your business is making progress but has been inefficient in making collections. When you ensure payments are made on time, the outstanding accounts receivable also reduces and you are required to acknowledge the receipt of the payment even in the accounts receivable ledger.

Once you have a clear concept of what is accounts payable and accounts receivable, you can also use it to manage your cash flow and manipulate it as per the requirement of the organisation. For both types of records, the common factor is that you need to put a proper process in place so that you do not have any outstanding payments from you or to you beyond the 90-day period that most corporations and organisations follow.

The difference between account payable and receivable also lies in the way they affect cash flow. While you can maintain some cash reserves by extending the due date on outstanding payables, account receivables allow you to receive finance based on the pending invoices. Account receivables factoring is used by lenders to provide you with immediate financial assistance against the money that is expected to flow into the company.

There is an added advantage to borrowing against accounts receivable. Even the follow-up on the invoices are taken care of by the lender directly with a business or organisation that owes you for any service or product received. This gives you more freedom to manage other business operations more effectively.

Also Read:

1) Do I Need a Business Bank Account for my Business?
2) Can I open a current account for a home-run business?
3) Is building Material Business Profitable?
4) What is the best business ideas to start on a highway in India?

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FAQs

Q. What are some examples of accounts payable?

Ans. A payable is recorded in your invoice every-time your organisation owes money for purchasing products or receiving services from suppliers or vendors. This includes different payables like purchasing goods from a vendor on credit, instalment or subscription payments that are due after the service or goods are received by the organisation.

Q. How do I check accounts payable and accounts receivable on my balance sheet?

Ans. Both these figures are recorded into your ledger in order to manage cash flow better. Accounts payable is any money that your organisation owes to another one. Therefore, it is listed under the current liabilities section of your balance sheet. On the other hand, accounts receivable denotes any pending payment from a vendor or customer to your organisation. Therefore, this amount is considered an asset and is recorded in the respective section on the balance sheet.

Q. How to use Accounts Payable to manage my cash flow?

Ans. The best way to manage Accounts Payable is to extend the repayment date. This allows you to have some cash reserves in order to carry forward any business operations. However, it is always a good idea to make all your payments before the due date. It helps maintain a good relationship with your suppliers and vendors. It also shows that your company has a good cash flow.

Q. How does accounts receivable affect cash flow?

Ans. Both accounts payable and receivable play an important role in cash flow management. Accounts receivable allows you to get finance or funding against the outstanding invoices in order to manage immediate capital for all your business operations.

Q. Is an account payable also a business expense?

Ans. No, Accounts payable is often misinterpreted as a business expense. However, these records are entirely different from each other. While your accounts payable is recorded on your balance sheet, business expenses are recorded on the income statement of any organisation.