September 27th, 2022
A few weeks ago, we talked about accounts receivable, now let us discuss the importance of accounts payable. These two are very similar and especially important terms in business accounting, but they actually are opposites. Accounts payable are better understood as what a business owes its suppliers. For example, any raw materials that your company buys from a supplier to construct your product are noted on your financials as payable. It is important to ensure that your payables are correct to reflect accurate numbers on your balance sheet, recorded as liabilities.
What are accounts payable?
Now we get into a little more detail about the different types of accounts payable. There are a few terms that will come up that you should be familiar with if you are running a business. The first one is liabilities. Liabilities are different from expenses. Liabilities are debts a company owes, which could be a delayed payment term, such as NET30. An expense is a company’s cost of operations and doing business, such as insurance, which could be paid Immediately with cash. Current liabilities, otherwise known as short-term, are typically due in less than 90 days. Some other examples of payables might be equipment or rentals, transportation, cleaning services, or uniforms. It is important to note that the only thing a business pays that is not considered an account payable, is their payroll!
At most companies, accounts payables departments are in charge of receiving, verifying, and processing invoices and then also ensuring all payments are made in a timely manner. When invoices are received, they will have payment terms on them. It is up to the accounts payable department to ensure that all invoices are paid on time according to the terms provided by the suppliers. To learn more about payment terms, please refer back to our article about accounts receivable. Accounts receivable and accounts payable are correlated to the fact that you must have money coming in (receivables) in order to pay your suppliers (payables). Paying your invoices on time will help keep you in a good relationship with your suppliers.
As discussed earlier, accounts payable are recorded on a balance sheet. The important parts of a payable to note are the vendor or supplier name, your account number, the invoice number (all invoices should have their own unique number), the expense type (expense or liability), the date the invoice was submitted or received, and the payment terms. You should always use a uniform system when entering invoices into your system, meaning that you use the same information from each invoice received to enter it into your system. This is also a good time to check if any of your invoices will receive a discount if paid early, such as insurance. Some suppliers will also note on their invoices that if paid by a certain date, they will discount the invoice (ex. 10% NET 30). This means that if the invoice is paid within 30 days of being submitted to you, the invoice will receive a 10% discount.
A valuable tool to use to record your payables is our FAVORITE tool, QuickBooks!
Per the QuickBooks website, the balance sheet details what a business owns, or its current assets, what it owes, its total liabilities, and what the business is worth, or its equity. You can filter your report to any date range you prefer, but most reports detail a month, quarter, or fiscal year.
Again, this is just a report to give you a quick glance at your company’s financial position. You may need to look at specific numbers in this report to determine how you can change your financial position or how changing one of the numbers affects your financial standing. For instance, if you decrease your liabilities, you will increase your equity, or the company’s cash value if all assets were liquidated and all debts paid off.
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