Accounts Payable Meaning / Definition
Definition of Accounts Payable – “Money owned by a company to suppliers.”
Accounts Payable Meaning – An Accounts Payable is an accounting term which refers to company’s obligations to pay the short term debts to their suppliers. It appears on the Liabilities side of the Balance Sheet under the head “Current Liabilities”. It is a short term liability of the company which needs to be paid within the period of 1 year.
Basically whenever the company buys goods and services on credit, Bills Payable is prepared. This is prepared by the seller or supplier. This bill consists of the amount due and maturity time of the bill with 3 days of grace period. So, when it comes to an organization, a company enters into hundreds of transactions daily,some on cash basis, some on credit basis. The amount due on the organization on making a short term credit purchase adds to Accounts Payable account. The amount in this account shows that company has the liability to pay off the amount within stipulated time.
Accounts payable only appears when credit purchase is made by the company. For the vendors, it is credit sale and the amount adds to Account Receivables account. This type of credit based accounting is knows as Accrual Accounting. There is no Accounts Payable if the purchase is on cash basis. Then there will only be cash inflows and cash outflows.
Accounts Payable Examples
Here is an example to understand Accounts Payable more clearly. Karan & Sons is a juice manufacturing firm. They require stickers for packaging purpose. Ram supplies the packaging material. So, they purchase 20,000 rupees of packaging material from Ram on credit on 15 March 2017. Ram writes a payable in which Karan & Sons needs to pay the amount due to Ram on say, 15 September 2017.
Now here comes the role of Accounts Payable. The amount Rupees 20000 will add to buying company’s Accounts Payable Accounts. And Accounts Receivables account in Ram’s book of accounts.
Importance of Accounts Payable – Why Accounts Payable is Used?
Accounts Payable plays a very vital role in any company. In the times of peak season, company requires cash in order to keep the operations going. However if company perform every transaction on cash basis, this results in cash shortage. So they go for AP. It buys the organization time to pay the supplier, and use that cash in some other productive activity or meeting Working capital goals.
For example – Suppose XYZ is a stationary. This is the peak season as admissions are going on. They made cash purchase of pens of 10000. However, if they have made credit purchase, these 10000 can be used in purchasing other items for the stationary.
Accounts Payable Vs. Trades Payable
People often confuse with Accounts Payable Meaning and Trades Payable Meaning. Sometimes they even use both the terms interchangeably. However, there is a fine difference between the two. Trades Payable consists of the credit amount arises due to purchase of raw materials from vendors. Whereas Accounts Payable refers to other short term related debts.
Accounts Payable Vs. Accounts Receivable
These are two completely opposite terms. Former is a money that company owes to its supplier, whereas Latter is a money owed to a company.