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Accounts Payable Definition

What is Accounts Payable?

Accounts Payable Definition:

The record of all unpaid bill amounts owed to suppliers on any given date by a business. 

Accounts Payable is the name of an account found on the Chart of Accounts (also called Accounts or Accounts List) in the bookkeeping software of any business.

This account is always reported on the Balance Sheet under Liabilities.

Hint: if your income is doubled up on the Income Statement it may be that you have linked your Accounts Payable to an Income account instead of a Liability account. Amend the link to fix this.

Accounts Payable Organization

Accounts Payable Definition and Information

Here is a step by step process from the time a business places an order to the time the bill is paid:-

Accounts Payable Definition
  1. The business opens an account with a supplier.

  2. The business orders goods from the supplier.

  3. The supplier provides an invoice for the goods.

  4. The invoice has to be paid within a certain number of days such as 7 or 30.

  5. The business enters the invoice into their bookkeeping system.

  6. The business regularly checks their accounts payable list.

  7. When a bill shows up on the list as due now the business pays it.

  8. The paid invoice is removed from the accounts payable list.

Recording Accounts Payable

When the invoice is entered into the bookkeeping system the following details are recorded:

  • The date of the invoice

  • The supplier name

  • The supplier address and contact details

  • The quantity of goods

  • The description of goods

  • The cost of the goods

  • The total that is due to be paid

  • The date the bill is due for payment

Go here for more info on how to reconcile accounts payable and to download an excel template 
to record your list of unpaid bills.

The accounts payable ledger will only show a summary of the invoice details:-

  • Date of invoice

  • Amount of invoice

  • Name of Supplier

  • Due date of payment

Overdue Accounts Payable

An invoice that has past the due date is called an overdue invoice, it is over the due date.

This overdue bill will remain on the accounts payable list until it is paid.

If the list of overdue invoices keeps increasing because the business does not have enough funds to pay, the owner/manager needs to investigate why there is not enough funds and rectify the issue as soon as possible. 

Accounts Payable DefinitionAccounts Payable Definition

A huge debt can kill a business.

A dissatisfied supplier might pass the overdue invoice to a debt collection agency.

The debt collection agency will charge fees which have to be paid by the business, not the supplier, so in the end the business will end up paying way more than the original invoice amount.

The fees are coded to ‘collection fees’ expense on the chart of accounts.

Accounts payable are a liability to a business.
The dictionary defines this as a legal responsibility, or in simple terms a burden and a problem!

Accounts Payable Journal Entry

This is based on goods purchased to the value of $100.00, and collection fees of $10.00

New purchase invoice

Debit     Expense account     $100.00

          Credit     Accounts Payable     $100.00

Recording collection fees

Debit    Collection fees           $10.00
          Credit      Bank account             $10.00

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Accounts Payable Definition

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