Accounts payable is a summary of your company’s short-term debt obligations, and is therefore a credit. The sum total of your accounts payable is a liability because it represents a balance owed to your vendors, suppliers, and creditors.

What is accounts payable and why is it important?

Accounts payable is a record of your company’s short-term debts that have not yet been paid. This includes things like credit card bills and pending invoices from vendors and suppliers, as opposed to mortgages and loan repayments that are longer term.

Because accounts payable is a liability, it is a credit entry. The credit balance indicates the money owed to a supplier. When that balance is paid, your company should debit accounts payable, which decreases the credit balance.

Your accounts payable shows up on your balance sheet. When you keep detailed and accurate records, you can use accounts payable to monitor your cash flow and make strategic decisions.

For example, if your accounts payable balance decreases over time, your company is paying for goods and services faster than it’s buying them on credit. If it increases, your company is opting to buy more goods and services on credit. This is helpful for business owners because it allows them to make strategic decisions about which payments need to be prioritized and when.

Companies who see seasonal lulls, for example, are likely to push short-term debts as long as possible during the slow season. This frees up cash for the company’s immediate needs like payroll, rent or mortgage, and more.

What’s the difference between accounts payable and accounts receivable?

Accounts payable is the sum of the money you owe to vendors and suppliers. This is considered cash outflow. Accounts receivable, on the other hand, is a log of the money you’ve received from selling your own goods and services to generate revenue.

When you have up-to-date accounts payable and accounts receivable, you can easily determine if your business is profitable. Simply add the total of accounts receivable and your business assets, then subtract the sum of accounts payable. If you have a positive number, your business is profitable. If it’s negative, your business is not profitable.

How to record credits and debits

Accounts payable entries in double-entry accounting are simpler than you think. Double-entry accounting is a system to prevent accounting errors by requiring book entries for each business transaction for both debits and credits. 

For example, imagine you spend $2,000 for supplies. You record this with the date, account name, account number, a description of what the expense was (such as “widget purchase from Acme”), and a $2,000 credit to your accounts payable. You’d also add an entry into your inventory account with $2,000 as a debit.

Once the debt is paid off, you’ll need to make more journal entries. First, you list the date and the account name. For a description, you might use “payment to Acme for widget purchase on [date].” You would debit accounts payable for $2,000, and credit your cash account $2,000.

The accounts payable process

Now that you know whether accounts payable is a debit or credit and what entries might look like, here’s a quick guide to the process:

  • Receive invoice and update your records: When you make a purchase, you record it as a purchase order. When a company sends an invoice, compare it to the purchase order to make sure the amount is the same. Pay special attention to whether the vendor honored all of the terms, like discounts or concessions. Decide when you plan to pay the bill, based on your cash flow management decisions, and note the terms in your records.
  • Pay debts: Next, it’s time to pay your debt and go through the reconciliation process. Compare the purchase order, approved invoice, and payment receipt. If there are no errors, you can credit or debit the appropriate accounts. If there are errors, audit the purchase to find the discrepancies.
  • Repeat regularly: Finally, review your accounts payable process regularly. Businesses usually review and reconcile their accounts payable on either a weekly or monthly basis. Spreading the work out over time ensures that you’re not bogged down at the end of the quarter or year. It also helps ensure that if there are errors, you can reconcile them immediately without jeopardizing your cash flow debts.

Of course, your process may vary—and if you automate your accounting tasks, you can save significant time and money while preventing human error. Whether you hire a financial professional to help your company properly perform accounting tasks, or work on your own using accounts payable software, the general process is the same.

Pay vendors effortlessly with North One Invoice Payments

With North One Invoice Payments, you can make effortless invoice submissions by uploading or forwarding unpaid invoices to North One via email and we’ll take care of the rest.

You’ll save hours a week and hundreds of dollars in bookkeeping fees with precise payments paid on the invoice’s due date. Plus, you can see all of your upcoming and completed invoice payments in one place, making it easy to stay organized and on top of your finances.

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