Accounts Payable — Definition, Example and Process
Accounts payable is any sum of money owed by a business to its suppliers, shown as a liability on a company's balance sheet.
Definition of accounts payable
Accounts payable refers to money a business owes to its suppliers, appearing as a liability on the balance sheet. When you purchase goods or services with a deferred payment arrangement, the unpaid amount constitutes accounts payable until settlement occurs.
The term is also known as bills payable, and the total of these liabilities is listed under “sundry creditors” on the balance sheet.
Example of accounts payable
Max Enterprises purchases goods valued at ₹1,00,000 from Ace Traders with a 30-day payment window. Until Max Enterprises settles this debt, the ₹1,00,000 qualifies as accounts payable and appears as a creditor liability on the balance sheet.
Why accounts payable matters
Businesses regularly procure goods and services on credit from suppliers. Accounts payable represents a significant source of cash outflow, and it requires efficient management.
These short-term liabilities must be honoured by specified dates. Delayed payments incur additional charges in the form of interest and late payment charges, and can damage supplier relationships and business credibility — which in turn may disrupt your supply chain.
The accounts payable process
A typical accounts payable workflow runs as follows:
- Evaluate supplier credit policies covering payment terms and discounts
- Finalise suppliers and procure goods according to your business procedures
- Record invoices on receipt of goods
- Document payment due dates
- Track approaching due dates using ageing reports
- Record payments in your accounting records
- Send payment confirmations to suppliers
Maximising the credit days available to you supports efficient cash flow management. Neglecting to track payments, on the other hand, puts the business at a disadvantage.
Questions about your own books?
Talk to a team that works with Tally every day.