What is accounts payable?
Accounts payable is any sum of money owed by a business to its suppliers shown as a liability on a company's balance sheet. In simple words, when you buy goods or services with an arrangement to pay at a later date, such amount till it is paid is referred to as accounts payable.
Accounts payable is also called as bills payable and the total amount that a company is liable to pay is shown as liability under the head ‘sundry creditor’ in the balance sheet.
Accounts payable meaning with example
Max Enterprises purchased goods worth 1,00,000 from Ace Traders. Ace Traders offered a credit period of 30 days within which the bill should be paid by Max Enterprises.
Here, till the date Max Enterprises pays Ace Traders, the amount of 1,00,000 will be called as accounts payables and shown as liability towards creditors in the balance sheet.
Accounts Payable vs. Accounts Receivable: Key Differences
Sound management of accounts receivables and accounts payables is crucial to assess a company’s financial health. While the two types of accounts are recorded in more or less similar way, it is imperative to keep in mind that one is an asset account and the other is a liability. Now, with the definition above, it can easily be concluded that accounts receivable is the money owed to your business by customers whereas, accounts payable is the money you owe to the suppliers. This gives us a clear understanding of which account is recorded under what criteria in the financial statement of a company. Since accounts receivable is the money owed to you, this will be recorded under assets, and since accounts payable is the money you owe, this will be recorded under liabilities.
Read more on what is the difference between accounts receivables and accounts payables?
Why are accounts payable and its management important?
Any business, whether manufacturing or trading, need to procure the goods or services from their suppliers and most times, you will be offered to pay on a later date. This results in a major source of cash outflows towards the trade payable and therefore businesses must manage it efficiently.
While accounts payable are short-term liabilities that need to be honoured within a specific date, any delayed payment will attract additional charges in the form of interest and later payment charges. Also, delayed payment may create ill-feeling and impacts the credibility of the business which in turn leads to disruption of the supplies.
Accounts payables involve a carrying cost, not just the additional charges for delayed payments but also the other form of cost. Find out by reading ‘Cost of Accounts Payables’
Accounts payable journal entry
Accounts payable journal entry is recorded when a business purchases goods or services on credit. Since accounts payable is a liability, it is credited when the liability is created and debited when payment is made.
|
Transaction |
Debit |
Credit |
|
Goods purchased on credit |
Purchases / Inventory A/c |
Accounts Payable / Supplier A/c |
|
Expense incurred on credit |
Expense A/c |
Accounts Payable / Supplier A/c |
|
Payment made to supplier |
Accounts Payable / Supplier A/c |
Bank / Cash A/c |
Accounts payable journal entry example
A business purchases goods worth ₹50,000 from a supplier on credit.
|
Account |
Debit |
Credit |
|
Purchases A/c |
₹50,000 |
— |
|
Supplier / Accounts Payable A/c |
— |
₹50,000 |
When payment is made:
|
Account |
Debit |
Credit |
|
Supplier / Accounts Payable A/c |
₹50,000 |
— |
|
Bank A/c |
— |
₹50,000 |
Accounts payable process
An accounts payable process has many moving parts, potentially manual process steps, and multiple people across the organization involved.
The accounts payable process starts right after you have decided to procure the goods or services on a credit basis. The following is the accounts payable process that you get to see in most of the business
- Evaluating the credit policy of the supplier in terms of credit days allowed, delayed payment charges, cash discount on early payment etc.
- Finalize the supplier and procure the goods in accordance with the procurement process followed by your business
- Once the goods are received, account the invoice in the books
- Need to pay special attention to record the due date within which the bills need to be paid
- Track the bills that are nearing the due date and plan to clear. Accounts payables and the ageing report will be of great help here
- Account the payments made in the books and it will good practice to keep a track the invoices against which the payments are honoured
- Send the acknowledgements such as payment advice or any other statement to inform the supplier about the payment that is made.
Taking full advantage of the credit days will help you to manage the cash flow efficiently. While it is easy but not tracking and knowing when to honour bills will prove to be a disadvantage to the business.
Accounts Payable Process Flow
|
Step |
Process |
What Happens |
|
1 |
Purchase requirement |
Business identifies goods or services required |
|
2 |
Purchase order |
PO is raised and shared with supplier |
|
3 |
Goods/service received |
Goods or services are received and checked |
|
4 |
Supplier invoice received |
Supplier sends invoice for payment |
|
5 |
Invoice verification |
Invoice is matched with PO and goods receipt |
|
6 |
Journal entry recorded |
Accounts payable liability is recorded |
|
7 |
Approval |
Invoice is approved for payment |
|
8 |
Payment |
Supplier is paid through bank/cash |
|
9 |
Reconciliation |
Payables are matched with supplier balances |
The accounts payable cycle starts when a purchase is made on credit and ends when the supplier is paid and the payable balance is cleared.
Accounts payable days
Accounts payable days show the average number of days a business takes to pay its suppliers.
Accounts Payable Days Formula
Accounts Payable Days = Average Accounts Payable ÷ Cost of Goods Sold × Number of Days
Example: If average accounts payable is ₹2,00,000, cost of goods sold is ₹24,00,000, and the period is 365 days:
AP Days = ₹2,00,000 ÷ ₹24,00,000 × 365 = 30.4 days
This means the business takes around 30 days on average to pay suppliers.
Interpretation table:
|
AP Days Result |
What it May Indicate |
|
Low AP days |
Business pays suppliers quickly |
|
High AP days |
Business takes longer to pay suppliers |
|
Very high AP days |
Possible cash flow pressure or delayed payments |
|
Balanced AP days |
Healthy vendor payment cycle |
How to manage accounts payable effectively
Effective accounts payable management ensures smooth cash flow and strong vendor relationships. Key practices include timely invoice processing, maintaining accurate records, setting clear payment schedules, automating approvals, and regularly reconciling accounts to avoid errors or delays. Using reliable accounting tools can further streamline operations and improve efficiency.
Importance of Accounts Payable
Accounts payable plays a crucial role in managing a company’s short-term liabilities and maintaining financial stability. It helps businesses track outgoing payments, avoid late fees, build supplier trust, and manage working capital effectively. Proper accounts payable management also supports accurate financial reporting and better decision-making.
Take a look at 6 Tips for Efficient Cash Flow Management
Accounts Payable in TallyPrime
Accounts payables in TallyPrime can be viewed using the following path:
Gateway of Tally> Display more reports> Statement of accounts> Outstandings>Payables
Read more on Cash and Credit Management
