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Accounts payable is any sum of money owed by a business to its suppliers shown as a liability on a company's balance sheet. In simple words, when you buy goods or services with an arrangement to pay at a later date, such amount till it is paid is referred to as accounts payable.
Accounts payable is also called as bills payable and the total amount that a company is liable to pay is shown as liability under the head ‘sundry creditor’ in the balance sheet.
Max Enterprises purchased goods worth 1,00,000 from Ace Traders. Ace Traders offered a credit period of 30 days within which the bill should be paid by Max Enterprises.
Here, till the date Max Enterprises pays Ace Traders, the amount of 1,00,000 will be called as accounts payables and shown as liability towards creditors in the balance sheet.
Any business, whether manufacturing or trading, need to procure the goods or services from their suppliers and most times, you will be offered to pay on a later date. This results in a major source of cash outflows towards the trade payable and therefore businesses must manage it efficiently.
While accounts payable are short-term liabilities that need to be honoured within a specific date, any delayed payment will attract additional charges in the form of interest and later payment charges. Also, delayed payment may create ill-feeling and impacts the credibility of the business which in turn leads to disruption of the supplies.
Accounts payables involve a carrying cost, not just the additional charges for delayed payments but also the other form of cost. Find out by reading ‘Cost of Accounts Payables’
An accounts payable process has many moving parts, potentially manual process steps, and multiple people across the organization involved.
The accounts payable process starts right after you have decided to procure the goods or services on a credit basis. The following is the accounts payable process that you get to see in most of the business
Taking full advantage of the credit days will help you to manage the cash flow efficiently. While it is easy but not tracking and knowing when to honour bills will prove to be a disadvantage to the business.
Take a look at 6 Tips for Efficient Cash Flow Management