What is “accounts payable”?

Are you a small business owner getting to grips with new accounting terms? Or maybe you’re a new team member who’s been assigned financial management tasks at work and there are some aspects you’re not too sure about. 

If so, you may have come across the term “accounts payable,” also known as AP. Here’s what that means and how to keep a proper record of it.

What is accounts payable?

Accounts payable is a record of what you currently owe. It’s all the money you owe suppliers, lenders, and vendors that you haven’t paid yet.

Example: You receive an invoice from a supplier for batteries in the amount of £1,000. Payment for the invoice is due in 30 days and you’ve not yet made the payment. This £1,000 would be considered part of your accounts payable.

What’s the difference between AP and AR?

Whereas accounts payable is the funds you owe, accounts receivable (AR) is money owed to you. An invoice sent to you from a supplier would count as AP, but an invoice you send to a client would be recorded as AR.

Asset or liability: Your accounts payable is a liability whereas your accounts receivable is an asset.

Why do I need to keep records of my AP?

It’s important to keep an accurate record of all your accounts payable for several key reasons:

• Cash flow management: Understanding what expenses you have coming up will help you gain control of your cash flow, ensuring you don’t accidently miss payments.

• Growth: When you have a clear picture of what you owe, you also gain a stronger understanding of what you have remaining. This can help you recognise times when investment and growth for your small business are possible.

• Taxes: Tracking your accounts payable can help you manage your tax reports more effectively.

• Vendor relations: More than 70% of British businesses were affected negatively by missed payments last year. Delaying payment to your suppliers can have a direct impact on the relationship you have with them, possibly resulting in slower delivery which can have a ripple effect on your customers. Accurate accounts payable records can help ensure timely payment.

How do I record accounts payable?

Like many accounting processes, you may choose to use digital software to help you keep a clean record. When you receive an invoice, write down the payment due date (7, 14, 30 days) along with the amount and the vendor owed. Then, once you’ve completed the payment, record the date and amount paid to clear the payment.

Example: Let’s say you are sent an invoice for £100. Payment for the invoice is owed in 14 days. In this instance, you would record the invoice in your accounts payable ledger, noting down the due date, amount, and vendor. From that point forward, this £100 would be recorded as an expense, so, even if the amount hasn’t been withdrawn from your bank account yet, it will impact your profit and loss statement for that period. Once the payment is made, it would no longer be considered an outstanding liability and would be removed from your accounts payable records. 

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Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

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