Accounts payable is how you track the debt you owe various sources for goods and services. AP is a large umbrella, and many subcategories fall underneath it. Examples of this can span everything from raw materials purchases to travel expenses.
Whenever your company receives an invoice for a transaction with suppliers, it gets tracked within your accounts payables. The accounts payable category helps you track any short-term debts or obligations to creditors, such as on purchases of goods and services. Since so many companies make these purchases, keeping track of AP inflow and outflow is crucial to understanding your cash flow. Because of this importance, having a specialized AP department that can monitor the payables process and prevent things such as payments on inaccurate invoices is essential. Having an accurate accounts payable balance can dramatically affect your cash flow statement and accounts payable turnover ratio, leading to better data for analytics and reporting.
Accounts payable, simply put, is a type of debt. It tracks the money you owe vendors for goods and services. This large umbrella can encompass a large swath of transactions, such as travel expenses, purchases of raw materials, and typical vendor payments. AP shows as an account within your general ledger when a company follows the accrual accounting method. When you track these short-term liabilities, they are found appropriately within the current liabilities section of your company's balance sheet. Because of this, accounts payable are considered a current liability account, while accounts receivable are classified as a current asset account (or simply an asset account).
While accounts payable is often considered the same thing as trade payables, it is important to realize they refer to slightly different things. Trade payables show the money that is owed to creditors for inventory-related items. For example, when your company purchases goods like office supplies, this falls under the trade payables umbrella.
When you owe debts to your vendors, your accounts payable entries will have a credit balance that shows any current liabilities. Once you pay that invoice, your credit balance will be debited that same amount. This fact means that it is both a credited and debited account because accounts payable has inflow and outflow.
In double entry bookkeeping, the debit shows on the left side of your journal entry, and a credit on the following journal entry would be on the right side. For example, here is a basic entry where someone has bought $400 of a product and then later pays that amount back from a cash account:
Accounts Payable Account
Accounts Payable Account
Many types of account software simplify double entry bookkeeping for you and your team. Some software even helps automate manual parts of this process for you. For more information about automation software and its benefits, take a look at the end of our article! What are some examples of accounts payable?
There are many situations where accounts payable comes into play. Many of these examples go through an entire purchase order (PO) workflow before being added as a payable journal entry, but they all may have slightly differing processing. Some examples of different types of accounts payable include trade payables and wages payable. Here are some other accounts payable examples that you may encounter:
Raw materials are the resources your company uses to make its products. For example, lumber or steel are common examples. These purchases are considered inventory assets. Raw materials can be classified into two subcategories, direct materials, which are the raw materials used to make your products (lumber, nails). In contrast, indirect materials are used to produce these items but aren't directly used within the product itself (such as factory machine parts).
Any debts for transportation, logistics, or freights fall under accounts payable. Since these logistics costs often are a huge factor in a company's profit margins, it is essential to keep careful track of these payments. It isn't uncommon for larger companies to outsource their transportation and logistics through a third-party company, often referred to as 3PL.
When someone like a subcontractor sends you an invoice, it is considered accounts payable as you pay them back for their services. Subcontracting within accounts payable is particularly common within the construction industry but is becoming more common as subcontractors grow in number. Keeping this process as smooth as possible is vital to keep your subcontractors happy and paid on time.
Travel expenses that employees accrue are sent to the accounting team and reimbursed through accounts payable. These charges can include things like Uber or taxi charges, flight tickets, and hotel room expenses. The items that can be expensed in this way will depend on the company's policy but should be paid back promptly regardless so that the money isn't absent from the employee's pocket for too long.
Most of a company's equipment that is purchased will go through accounts payable at some point. This tracking includes rented equipment such as larger construction tools or vehicles and items bought for the office like machinery parts. Equipment can take on many different forms depending on the industry your company works in but regardless is often a pretty hefty expense.
Any leases, whether on office space or for equipment, are counted within your accounts payable. These kinds of payments often also fall under the lease accounting category. There are two common types of leases, which are operating leases and financing leases. These lease types are differentiated by whether there is lower risk and lower reward, or vice versa.
There are many times when licensing fees fall within accounts payable. For instance, if your company often deals with licenses for software such as Microsoft Office, patents, or copywritten items, you may have many licensing transactions. The most common of these are software licenses, as many companies have to pay for their users to have access to standard necessary tools for their daily work. Software licenses can be a one-time charge, but more and more often are monthly or yearly charges.
When you receive a vendor invoice, the payable process comes into play. As long as you owe a debt to those vendors, the amount will stay credited to your AP account. Once you pay them off, you will debit your AP account and credit another account, such as a cash account. Vendor payments can cover a large portion of your transactions depending on your company structure, so keeping these organized and well-managed can be essential.
The best way to tackle your accounts payable or accounts receivable is by empowering your team with automation. These tools can help your team with things like risk reduction and vendor relations. By implementing AP automation, you save time for your payable department to focus on things that matter most such as vendor relationships. With Routable, you can reduce repetitive tasks by 70%.
Want to learn more about how you can simplify accounts payable for your team? Contact us for a demo.
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