Accounts payable (AP)
What is accounts payable (AP)?
Accounts payable (AP) represents money owed by a company to suppliers and its obligation to pay off these short-term debts within a given period. This amount is recorded into a general ledger along with all your financial transactions to keep track of your expenses in one master log. AP will also appear on a business’s cash flow statement, which is another important figure in showing off a company’s true financial leverage.
Why is accounts payable important?
As mentioned above, accounts payable are essentially short-term IOUs. Once recorded into your accounting system, AP may only be debited when the bill is paid. This means that your business’s liability is the result of offsetting debit and credit at all times with each entry made into your ledger.
When your AP increases over time, that signifies your company is buying more on credit instead of paying cash. Alternatively, if your AP decreases, that means your company is paying off its prior debt at a higher rate than purchasing new goods or services on credit.
Furthermore, auditors will often focus on accounts payable for a better understanding of your company’s outstanding debts over a period of time. Think of your AP as the key to presenting a healthy and well-balanced business.
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How to put accounts payable into practice
Now that you know what accounts payable is and why it’s important, here's how to put this double-entry bookkeeping system in place. Whether you’re a manager, company owner or just starting a business, you’ll need to keep track of every expenditure in order to avoid getting into long-term debt. It's an important part of your bookkeeping efforts.
The first step is to collect any bill or invoice that comes your way. Then, you’ve got to credit your accounts payable into your general ledger. This amount will automatically increase the total your company owes.
The second step is to add a debit to offset that credit. Here, you’ll need to work on your company’s balance sheet — and balance it. When the time comes to pay out the invoice, you can finally move that debit to your AP section.
Here’s an example: Say your business gets an $800 invoice for printing supplies. That invoice will be written down as an $800 credit in accounts payable, but marked by your bookkeeper as an $800 debit in business expenses. Once you pay it, you can see the amount debited in your AP.
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