What are Accounts Payable?
- July 30th, 2014
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What are accounts payable? An account payable is a financial obligation that a company has to pay a supplier for goods or services that it has received in advance of payment. Oftentimes, a company that frequently orders goods and services from another company will establish a line of credit with them, so that payment isn’t necessary immediately at the time of purchase.
A company that extends a line of credit to another is called a creditor. That simply means that the companies that purchase goods or services from the creditor owe the creditor payment at a later date. Companies that place orders with creditors are subsequently invoiced for the amount due for whatever goods and services they received, and that debt is paid within an agreed upon period, usually ranging from a few days up to one year.
When a debitor, the company that owes the creditor payment for goods or services that have already been delivered, has an outstanding account payable, that’s considered a current liability for the purposes of record-keeping. A current liability is an obligation that is logged on a company’s balance sheet that must be paid within one year of its entry date.
Current liabilities require the use of a current asset in order to be repaid, or they will create another current liability. One year is a standard period of time for these terms to operate within, but some companies run on extended operating cycles, in which case their obligations must be met within that particular time period.
On the creditor’s end of the deal, that account payable is considered an account receivable for them, and is logged as a current asset.
What is a Bill Payable?
A bill payable is a document that lists the amount due for goods and services that were provided on credit. The unpaid invoice for an account payable is considered a bill payable. Monthly phone bills, other utility bills, and repair or maintenance bills are all considered bills payable.
Companies that keep their books using the accrual method will document a bill payable as a credit entry in the Accounts Payable section. Once the bill is paid, a debit is entered into the Accounts Payable, zeroing out the balance. The credit balance in Accounts Payable is then reported on the company’s balance sheet as a current liability.
An Example of Accounts Payable
Some pipes burst in the bathroom at Luigi’s Italian Restaurant, and Luigi needed to call Henry’s Plumbing Company (HPC) to repair the damages. Service workers from HPC came to Luigi’s to fix the burst pipes on January 1, and tell him that HPC will be billing his restaurant for the amount due.
Luigi doesn’t have to pay the workers on-site, and receives a bill in the mail from HPC on January 6. The invoice states that the balance for the repair work that was done will be due within 30 days. Luigi reviews the invoice, and logs it in his records with a credit to his Accounts Payable.
When he sends a check to HPC for the amount due on January 15, he logs a debit for that amount in his Accounts Payable, so that his records reflect that he no longer owes any money for the services provided. Until HPC receives Luigi’s payment, the invoice that they sent him serves as a documentation for Luigi’s account receivable in their records.