19. Aug 2019 |

What is Accounts Payable (AP)?

Accounts payable is a general ledger account for money owed that does not come with a promissory note. Whenever a business receives an invoice with payment terms, it gets entered into the Accounts Payable ledger and increases the total liabilities of the business.

Accounts Payable
It’s a good idea to keep your accounts payable invoices in one place, so you can refer back to them if you need to. (© Unsplash)

Even if the invoice is paid right away, by nature it is an accounts payable item and should be recorded as such. Here are a few other common questions people have about accounts payable:

Are Accounts Payable an Expense?

Strictly speaking, accounts payable (AP) are not expenses—although you might colloquially refer to both of them as expenses, the accounting terms mean two different things. Accounts payable and expenses fall under two separate general ledger (GL) accounts. Generally, the accounts payable GL is for money owed that hasn’t been paid yet, whereas expenses are costs which have already been incurred. Accounts payable is also a permanent account that appears on the balance sheet, whereas expenses is a temporary account that shows up on an income statement.

How are Accounts Payable Recorded?

Accounts payable is a permanent ledger account that accrues over time – but when AP items are paid, the amount associated with them has to be removed from the ledger. When an AP invoice is received, the amount is therefore recorded as a credit to the accounts payable ledger account and a debit to the expense ledger account – then when the item is paid, the accounts payable ledger account is debited and cash is credited to balance the books.

How do Accounts Payable show up on the Balance Sheet?

On the balance sheet, accounts payable shows up as a current liability—unlike expenses, which are a temporary account that show up on an income statement. Since Assets = Liabilities + Equity, having more payables in the system will increase the total liabilities of a business and therefore decrease the amount of equity left, as they should: the more money you owe to everyone else, the less money is left over for you!

What is the Accounts Payable Process?

Usually when an invoice is received, the payable will be recorded in the ledger, most often with the help of accounting software. Businesses will sometimes decide to issue all AP payments on a particular day of the week, or every few weeks depending on the volume of invoices they receive. If you are a freelancer and don’t have a lot of invoices coming your way, you might just decide to pay the invoices you do get as you receive them. Once the invoice is paid, usually the payment is recorded in the system against the invoice, and the accounting software will make the necessary entries to reverse the amount from the accounts payable ledger and credit the cash ledger as described above.

What is the Difference between Accounts Payable and Accounts Receivable?

Accounts payable represents items that are due to be paid by your business—payable bills, or the invoices you get from vendors. Accounts receivable represent invoices you’ve sent that are due to have payments received. This can be confusing to some people because the words payable and receivable can be used to describe both types of invoices, depending upon your perspective—but remember that the perspective accounting takes is the one that might be taken by your bank account, if it were personified: I have to pay these invoices, but get to receive money from these.

Tips for Managing Accounts Payable

1. Wherever possible, ask for digital invoices and file them

It’s a good idea to keep your accounts payable invoices in one place, so you can refer back to them if you need to. If you have digital copies of all your invoices in one place, you won’t have to go digging for them at tax time, and there’s a greater likelihood that you won’t miss business expenses that you can claim. This can save your money! Additionally, it is ideal to have to separate folders for AP items – one for paid ones and one for unpaid ones. That way, it’s easy to keep track of what bills have yet to be paid.

2. Choose digital payment methods where possible

Digital payment methods, in addition to being instant, will give you a record of exactly when the payment was sent and for how much. Additionally, if you’re on a tight budget and need to pay invoices at specific times, you’ll avoid risking an NSF cheque.

3. Keep an eye on your Balance Sheet

Since accounts payable will show up as a current liability on your balance sheet, the report is a convenient way to make sure you’ve paid your bills. If you have an unusually large AP amount, you’ll know to check your records more closely to see which ones are still outstanding.

Accounts Payable is one of the simpler accounting tasks to manage, especially if you have accounting software to do the ledger entries for you. Although the ledger calculations can be confusing if you are new to accounting, managing them is simple: pay your bills, and keep the records of having paid them!

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