Accounts payable is as any sum of money owed by a business to its suppliers, or creditors for the goods purchased from them on a credit basis. It is a current liability on the balance sheet of a company.
In simple words, when you buy goods or services with an agreement to pay at a later date, this amount is known as accounts payable before the payment is done
Accounts payable are often referred to as bills payable. The cumulative amount to be charged by a corporation is displayed in the balance sheet as liability under the heading’ sundry creditor.’
An Account payable department of a company is responsible for making payments to vendors and other creditors owed by the company. A significant role of the department is to ensure that reliable internal controls, are in place to prevent errors such as incorrect payments or duplicate payments.
Accounts Payable as a term is not just limited to companies or businesses. Even people like you and I also have accounts payable in some way or the other.
Any business involved in the transaction would need to record it in their books of accounts in some or the other way.
For example, Company X should consider it as accounts payable, or creditors as they’ve received the goods. On the other hand, Company Y who are the debtors should consider it as accounts receivable, as they’ve supplied the goods to X company and is thus awaiting payment for them.
Example of Accounts payable
Let’s understand this term from a company’s perspective.
Jack Traders provided a credit period of 30 days during which ABC Company should pay the bill.
Here, the amount due will be referred to as accounts payables and shown in the balance sheet as a liability against creditors before ABC Company pays Jack Traders.
Accounts payable are usually short-term debts that require settlement to prevent defaulting within a certain period. The transaction is treated as a liability before it is paid off.
Days Payable Outstanding is a crucial factor when talking of accounts payable (DPO). It helps to characterize the number of days an organization takes to pay its vendors. The greater the DPO of a company, the longer it can make use of its available cash.