Whether you’re an accounting student, a recent college grad, or a small business owner, you may have questions about what accounts payable is, how it works, and best practices.
As an important indicator of the health of a business, accounts payable is a gauge of cash flow. Properly managing the accounts payables process ensures consistent and accurate financial information, while also supporting strong business relationships with vendors and suppliers.
To understand the ins and outs of accounts payable, let’s take a look at some frequently asked questions.
What is accounts payable?
By definition, accounts payable (AP) refers to all the expenses of a business, except payroll. This includes all of the money a company owes to vendors and suppliers for goods and services provided to the business before they are paid.
Is accounts payable a revenue?
No. Accounts payable are liabilities that represent the purchase of goods or services that a business has not yet paid for. It is an obligation to pay.
Is accounts payable a liability?
Yes. Accounts payable are current liabilities that include the money a business owes to third parties. Accounts payable most commonly include purchases made for goods or services from other companies.
What is the difference between accounts receivable and accounts payable?
Accounts receivable (AR) is different than accounts payable in that AR includes the money owed to your business by customers or clients. The amount is recorded under accounts receivable until the balance is paid.
On the other hand, accounts payable represent unpaid purchases for goods or services. It includes all of the expenses your business owes, minus payroll.
Is accounts payable debit or credit?
Accounts payable is a current liability that a company will settle within twelve months. Accounts payable is a credit when the business purchases goods or services on credit. The balance is a debit when a portion of its account payable is paid.
Consider this example: If your business purchases goods from a vendor and agrees to pay after one month, accounts payable is credited. One month later, when you pay back the amount owed to the vendor by cash payment, your liability will go down and your accounts payable account will be debited.
Is accounts payable an asset?
Accounts payable is not an asset. It is a liability.
Because accounts payable represent short-term debts, it is characterized as a current liability on your balance sheet. Accounts payable entries result from a purchase on credit instead of cash. Current liabilities are due within 90 days or less.
Is accounts payable an expense?
No. The main difference between accounts payable and expenses is how they are recorded on a company’s financial statements. Accounts payable appear on the balance sheet, while expenses are recorded on the income statement.
While related, expenses include all costs related to business operations, while accounts payable focus on obligations a business has to suppliers, vendors, debtors, and creditors. Accounts payable records the money your business plans to pay to third parties, while expenses include the costs necessary for business operations, including utility payments and payroll.
There is also a difference in terms of time period. Accounts payable is a short-term liability, while expenses are operational costs incurred over an entire fiscal year.
Does accounts payable go on the income statement?
No. Accounts payable is located on the balance sheet. Expenses are recorded on the income statement.
Income statements can help track a business’s financial health. Striking variations on an income signal that a company’s finance team may need to make changes or adjustments, including switching suppliers, revising prices, or slashing the budget.
What is 3-way matching in accounts payable?
3-way matching is an accounts payable process that matches up the purchase order, goods or services received, and invoice details to validate the purchase prior to issuing a payment to a vendor or supplier.
Similarly, 2-way matching ensures the details on only the purchase order and invoice are aligned.
Both of these accounts payable processes check for discrepancies prior to approving and paying invoices.
What are the biggest challenges with accounts payable?
Manual processes, late payments, and fraud are just a few of the significant challenges many professionals face when it comes to accounts payable. By automating the accounts payable process, small businesses, professionals, and accountants can alleviate these challenges and gain visibility into critical financial insights.
With accounts payable automation, invoices are processed effectively and bills are paid on time, saving businesses significant time and money. This enables a shift to more value-added activities like improved forecasting, fraud prevention, and a renewed focus on profitability.
How accountants can automate accounts payable
In the accounting world, competition is fierce. To expand your offerings and better serve your clients, today’s accountants need a complete solution to streamline operations and automate the accounts payable process.
Enter Accounting CS, a professional accounting software for accountants that combines write-up, trial balance, payroll, financial statement analysis, and more. It’s designed for professional accountants who serve multiple clients, allowing flexibility to handle all types of industry and entity types.
You can use Accounting CS Client Access to offer a completely new way to work with your business clients in real time, so you can provide more timely responses and consultative advice. This real-time collaboration eliminates version conflicts, software updates, security loopholes, imports, exports, and other inefficiencies.
Bottom line: client expectations are higher than ever. With built-in client check writing, client payroll, accounts payable, and accounts receivable capabilities, you’ll make it easier for clients to keep doing business with your firm. And with faster, more meaningful insights and a comprehensive and strategic knowledge of their operations, you’ll become your clients’ go-to advisory guru.
For more information about automating accounts payable for your firm, visit the Accounting CS contact page.