Every professional accountant is well-versed with receivables and accounts payable. And most people know how central these accounts are to business operations. In one way or another, they largely affect your business’s profitability.
In this blog, we’re going to be looking at accounts payable in detail. Let’s get started:
What are accounts payable?
Long story short, any money that your business owes to anyone is considered to be a part of accounts payable. Most businesses make a lot of purchases, and since a lot of these transactions take place on credit, they are categorized as accounts payable.
Such items include inventory, office stationery, raw material, equipment, and subscriptions such as monthly internet payments. The day you accept the delivery of any of these services, the transaction is recorded as accounts payable.
The total cost is the debt that you owe to the dealer. In other words, the accounts payable figure indicates that you have a pending outflow of cash.
Let’s look at another scenario that qualifies as accounts payable: your electric company renders its services all month. At the end of the month, you owe them money for that electricity. The day you receive your monthly bill, your accountant will record the entry as accounts payable. The day you pay off the bill, the entry will be debited. So you don’t necessarily have to purchase on credit for an item to be categorized as accounts payable.
Why do accounts payable matter?
To begin with, accounts payable gives you clarity on what your business owes to creditors. If you’re not clear about your debt situation, you can never be sure about the overall financial health of your company.
If your company is making huge profits but you’re not paying creditors, you’re not exactly making profits. There are sizable accounts payable that are yet to be subtracted from your gross profits.
Moreover, a company that mismanages or miscalculates accounts payable won’t have a great reputation. Mismanaged accounts payable entries can also lead to missed payments. In the long run, this can even lead to losing a supplier.
If it becomes a trend, no supplier will want to provide goods to you. On the other hand, a happy vendor may even offer you better rates.