What is Accounts Payable
Accounts payable is a type of current account operated by a business for the sole purpose of purchasing goods or services on short-term credit. The account usually exists within the company’s ledger, intending to pay money owed to creditors within the shortest timeframe so as to prevent default. This type of account constitutes a form of liability and is treated as such. In some cases, accounts payable could be a department within a company, which manages and makes payments of money owed to creditors.
The operation of accounts payable is not limited to companies alone. Individuals can also run such accounts. Such is common with utility services offered to customers, while the payment is made at the end of the month or within a specific time.
Importance
Operation and management of accounts payable are integral to the operations of businesses and the day-to-day activities of individuals. The following are some of the reasons that highlight the importance of operating accounts payable.
- It helps with the timely payment of money owed to creditors, which preserves the financial relationship between a company and its service providers.
- Timely payment of credit owed ensures the seamless supply of goods and services, which is vital for the operations of all the companies and businesses involved.
- In most cases, proper operations of accounts payable prevent a company from incurring late fees, penalties, and overdue charges.
- Properly operated accounts payable helps to prevent missing and multiple payments through active tracking and management of payments.
- It is useful in the management of cash flow as payments are made when required, and credit is adequately utilized.
- The procedural operation of accounts payable, if followed accordingly, minimize the chances of fraud for all the parties involved.
Proper management of accounts payable involves accurate recordkeeping of all transactions. Accuracy and efficiency are paramount to prevent multiple payments and omissions of payments, which can lead to extra charges or even losses. Therefore, the proper management of accounts payable is extremely important to businesses and their service providers.
Usage
Accounts payable has a wide range of usage in the everyday operations of companies. These uses include the following.
- It is used to acquire and manage external credit from service providers for goods and services offered to the businesses. These goods and services include utility bills, office stationaries, travel expenses, and other things required for company activities.
- It is used for payment of the company’s internal credit and management of petty cash. It is also used for the control certificates related to sales tax.
- It is also used as a useful tool for cost reduction and development of money saving strategies. Departments responsible for the management of accounts payable may take advantage of discounts offered by service providers as a result of payment of credit within a specific timeframe. This advantage also helps to foster healthy relationships between the parties involved.
Example
There are various examples of accounts payable. For example, a business may receive a $1,000 credit invoice for a service offered by a service provider. The company then records the $1,000 against its accounts payable. The amount is documented as a debit in the company’s records, even though actual money is yet to be paid. This method conforms with conventional accounting procedures. In due time, the company pays the money owed and debit the accounts payable.
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