Cloud Controller Inc. | Accounts Payable
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Accounts Payable

Accounts payable is a current liability representing amounts owed to others for goods, supplies, or services purchased on open account. Accounts payable are due to a time lag between the receipt of services or acquisition of title to assets and the payment for them.

Accounts Payable is also referred to as A/P, trade accounts payable, or payables. This is a common balance sheet account for businesses of all sizes. This account is important for many reasons. These reasons include importance on various ratios, continued relationship with vendors and cash flow planning. 

Accounts Payable as an Accounting Entry

Accounts payable is a liability. A debit entry will decrease this balance while a credit entry will increase.

Accounts payable is created when an expense has occurred, but not yet paid. Let’s assume your company purchased $100 in office supplies. These office supplies were received in June, but do not have to be paid for until July. The following journal entry would be created:

Debit- Office Supplies Expense: $100.

Credit- Accounts Payable: $100

As you can see, accounts payable is the offsetting entry for an expense that has been incurred, but not yet paid. What happens when it is time to pay?

Debit- Accounts Payable: $100

Credit- Cash: $100

This transaction eliminates the $100 account payable we created in the first example. Accounts payable will likely be from more than one vendor. A payment to one vendor will likely not reduce this account to $0.

When do you use Accounts Payable?

Accounts payable is a common account seen on most balance sheets. This account would take place whenever you have an invoice outstanding. This account is the offsetting entry for an expense that has not yet been paid. Due to the nature of this account, it is only used in accrual accounting methods. This account would be used any time your company has an outstanding invoice. 

Financial Ratios that include Accounts Payable

Financial ratios that utilize accounts payable are:

  • Current Ratio
  • Quick Ratio
  • Current Cash Debt Coverage Ratio
  • Debt/Equity Ratio
  • Accounts Payable Turnover Days

Accounts Payable Explained

Accounts payable is an balance sheet account used to account for unpaid expenses. Accrual accounting reports an expense in the period that it is incurred, accounts payable is the credit entry if this expense is not paid upfront. A debit to accounts payable and a corresponding credit to cash will later take place to pay for this expense.

Accounts payable management is important for all companies. Having past due invoices can not only look bad on your company, but it could ruin your vendor relationships.