When a company purchases goods on credit which needs to be paid back in a short period of time, it is known as Accounts Payable. It is treated as a liability and comes under the head ‘current liabilities’. Accounts Payable is a short-term debt payment which needs to be paid to avoid default.
Description: Accounts Payable is a liability due to a particular creditor when it order goods or services without paying in cash up front, which means that you bought goods on credit. Accounts Payable as a term is not limited to companies. Even individuals like you and me have Accounts Payable.
We consume electricity, telephone, broadband and cable TV network. The bills get generated towards the end of the month or a particular billing period. It means that the service provider gave you some service and sends the bill which needs to be paid by a certain date or else you will default. This becomes Accounts Payable.
Let’s also understand from a company’s point of view. You are a company A who purchases goods from company B on credit. The amount raised needs to be paid back in 30 days.
Company B will record the same sale as accounts receivable and company A will record the purchase as accounts payable. This is because company A has to pay company B.
Under the accounting (Accrual) methodology, this will be treated as a sale even though money has not exchanged hands yet. The accounts department needs to be extremely careful while processing transactions relating to Accounts Payable.
Here, time is the essence considering it is a short term debt which needs to be paid within a specific period of time. Along with that accuracy is the key, which involves the amount that needs to be paid along with the name of the supplier. Accuracy is important because it will impact the company’s cash position.
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