Commonly Used Terms
Accounts payable is the money that a company owes to its creditors shown on the liabilities side of a company's balance sheet.
An accounts payable turnover ratio is a ratio that is calculated on the basis of the average number of times a company pays its creditors over an accounting period. It measures the short term liquidity of a business. The payable turnover ratio is calculated by dividing net credit purchases by average accounts payable.
A variety of expenses come under account payables, including product material related expenses.
Accounts payable generally show a credit balance as is expected of a liability account. Hence when an invoice is recorded, accounts payable is credited, and another account is debited. When a payment is made, however, the accounts payable will be debited, and cash will be credited. Thus, as per double-entry accounting, the credit balance in accounts payable must be equal to the invoices received from the vendors.
Under the accrual method of accounting, the company receiving goods or services on credit must report the liability no later than the date they were received. The same data would be used to record the debit entry to an expense account. Hence, accountants say that under the accrual method of accounting, expenses are stated when they are incurred (not when they are paid).
The analysis of accounts payable requires enormous effort in reviewing the details and accounts in order to ensure that accurate and legitimate amounts are entered into the accounting system.
The requisite information will be found in the following documents.
- Purchase orders issued by the company
- Receiving reports issued by the company
- Invoices from the company's vendors
- Contracts and other agreements
The legitimacy and completeness of a company's financial statements are dependent on the accounts payable process. A well-run accounts payable process must include
- The timely processing of accurate and legitimate vendor invoices,
- Accurate recording in the appropriate general ledger accounts, and
- The accrual of obligations and expenses that have not yet been completely processed.
A company's cash position is affected by how effectively and efficiently an account payable process takes place in addition to credit ratings and its relationship with its suppliers.