Small Business Bookkeeping Guide

6. Guide to Accounts Payable

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Business Finance

Guide to Accounts Payable

Mar 10, 2023 • 6 min read
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      Your business isn’t an island. It relies on other businesses to supply the goods and services it needs to keep running. And while some businesses may expect payment from you immediately upon sale, others may send you an invoice for their goods or services.

      The amounts on these invoices—and your payments on them—cumulatively make up your accounts payable account.
      Note: Only companies that keep their books on the accrual basis of accounting will have an accounts payable account.

      What is accounts payable?

      Accounts payable is a balance sheet account that represents money your business owes to other businesses, such as your vendors and suppliers. Since these other businesses are typically paid in less than a year from when they provide you with their goods or services, accounts payable is a current liability on your business’ balance sheet.

      Your business’ accounts payable balance increases whenever it receives goods and services that it has not yet paid for. Conversely, it decreases whenever it makes a payment for these goods and services.

      Accounts payable can also refer to the department within a company’s accounting function that is responsible for verifying amounts owed to suppliers and vendors and, ultimately, for ensuring that company pays these businesses in a timely manner.

      How to do accounts payable.

      Whenever your business is provided with goods or services that your business does not pay for immediately upon sale, the supplier or vendor providing the goods or services typically invoices your business for the amount owed.

      Based on this invoiced amount, your business then increases its accounts payable balance accordingly. Since accounts payable is a liability account on the balance sheet, this increase is recorded as a credit to the accounts payable account.

      The other side of this entry—the debit—is typically made to an inventory account for goods purchased or to an expense account for services purchased.

      Then, when payment is finally made on the invoice, you reflect this payment by crediting your cash account and debiting your accounts payable account for the amount paid.

      Accounts payable example.

      Let’s say you own a locally-sourced produce market that gets a monthly shipment from a nearby apple farm.

      The price of these apples is $1,000, but you’re on net-60 terms with this farm, so your market won’t actually pay the farm for these apples for another couple of months.

      Your market may present you with an invoice for these $1,000 worth of apples, or you may have an ongoing credit arrangement with this farm.

      In either case, it’s important for your accounting records to reflect that you owe this farm $1,000 for these apples. That’s what the accounts payable balance represents.

      When you receive these apples, you increase your accounts payable balance by $1,000. You also increase your inventory account by $1,000 to record the apples now on your shelves. So the journal entry in your company’s books would be:

      • Debit inventory: $1,000
      • Credit accounts payable: $1,000

      Fast-forward two months from now, you finally pay the farm for the apples, per your net-60 payment terms. At this point, to reflect the money you paid the farm, you decrease your accounts payable balance by $1,000 and decrease your cash account by $1,000. Your new journal entry in your company’s books reads:

      • Debit accounts payable: $1,000
      • Credit cash: $1,000

      As you can see from this example, accounts payable lets you know how much money your business owes in the short term—generally the next 30, 60, or 90 days depending on the billing terms you’ve negotiated—to your vendors and suppliers.

      Is accounts payable an expense?

      As a balance sheet account, accounts payable is not an expense. Rather, at any given time, it provides a snapshot of money owed to a business’ vendors and suppliers. Of course, some of the transactions reflected in a company’s accounts payable balance could be expenses. 

      For example, let’s say a business hires an attorney for legal services, and this attorney invoices the business monthly. When the business receives each invoice, it records not only an increase to accounts payable, but also an increase to its legal fees expense account.

      However, not all transactions reflected in a business’ accounts payable balance are necessarily expenses. In the grocery store example above, the purchase of apples represented an increase in the store’s inventory account, which is a balance sheet account, not an expense account.

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

      While accounts payable represents the money that a business owes to other businesses, accounts receivable represents the money that a business is owed from other businesses.

      Theoretically, the business that sends you an invoice for a good or service provided would record the amount you owe them in their accounts receivable account, and you would record the same amount in your business’ accounts payable account.  And then when your business pays the invoice, you would decrease your accounts payable account in the amount paid, and the business you paid would decrease their accounts receivable account in the same amount.

      Why is accounts payable important?

      Your accounts payable account is important because it represents money that your business will have to pay to its vendors and suppliers in the very near future.

      As a business owner, you should frequently compare your cash account to your accounts payable account and other short-term liability accounts to not get behind on your business’ bills and other obligations.

      By keeping and regularly monitoring your accounts payable account, you will improve not only your business’ cash flow, but also your relationships with your vendors and suppliers.

      About the author
      Logan Allec

      Logan Allec is a CPA and owner of tax relief company Choice Tax Relief, which negotiates with the IRS and state revenue departments on behalf of business owners who have fallen behind on their individual, corporate, or payroll tax obligations. With over a decade of experience consulting with business owners about their tax issues, Logan has seen almost everything when it comes to tax negotiations with the IRS and state tax authorities. Prior to starting his own tax resolution practice, Logan was in a managerial capacity at a Big 4 professional services firm, handling tax issues for billion-dollar companies. In addition to running Choice Tax Relief, Logan also owns the personal finance blog Money Done Right, which educates thousands of readers a day about making, saving, and investing money. Logan also runs a YouTube channel on which he publishes weekly videos about what everyday Americans need to know about taxes and tax relief. He has been a licensed CPA since 2010 and holds a master's degree in business taxation from the University of Southern California. Logan lives in the Los Angeles area with his family. When he's not working, he enjoys playing basketball, taking his kids to Disneyland, and discovering new hot sauces to enjoy.

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