The Types Of Accounts Payable & One Good Way To Manage Them
Running a business necessitates cultivating meaningful relationships with people in your business sphere, and a great way to achieve that is by being responsive and organized in managing account payables.
What is Accounts Payable?
Accounts Payable, or AP, pertains to short-term financial obligations a company owes to its suppliers. These obligations are recorded as liabilities on the company’s balance sheet. Accounts payable represent the aggregate of all outstanding amounts owed to vendors by a business.
In the dynamic world of business, where innovation and collaboration are essential for survival, being on top of your account payables can help you and your business in several ways, like:
- Strengthen your relationship with different stakeholders.
- Build the credibility of your brand by never letting a payment go overdue.
- Stay stress-free by centralizing payables.
Several types of payments can be registered under accounts payable, such as:
- Trade payable: A trade payable refers to an amount invoiced to a company by its suppliers for the goods or services received or utilized as a part of the company’s usual business activities. If settled on credit, these invoiced sums are logged in the accounts payable ledger and feature as accounts payable until they’re paid.
Accounting for trade payables involves recording the amount in a distinct accounts payable section that best represents the nature of the transaction. Trade payables are typically categorized as current liabilities, since they are usually expected to be settled within a year. At times when this is not the case, the amount can be categorized as a long-term liability.
- Non-trade payable: Non-trade payables are financial obligations that a company owes to parties other than the suppliers. Liabilities under non-trade payables encompass the amounts a company owes to its stakeholders for operations, goods or services that are not directly linked to its core operations. Non-trade payables usually cover broader financial obligations than trade payables.
- Taxes payable: Tax payables are liabilities registered as taxes owed by a company to the government. Most tax payables are settled relatively quickly, meaning they are not present in a company’s balance sheet for an extended period. An example of taxes payable is corporate income tax, where the liability is logged at the end of each accounting period.
- Wages payable: Wages payable refer to the responsibility that an organization has for the wages earned by its employees but are not yet disbursed. For internal financial statements, a company might omit recording the wages payable during the interim reporting period if the amount is considered insignificant. However, acknowledging the wages payables might still be necessary for accurate financial statements at the end of the year.
What is not a type of accounts payable?
Loans payable or notes payable are typically not accounts payable, since they’re incurred for the long term and involve interest payments. Loans payable are financial obligations a company owes to external entities after borrowing funds for business operations or projects. They represent the outstanding amounts that the company needs to repay over time, along with the associated interest. Some examples of loans payable are bank loans, bonds, lines of credit and lease obligations.
How are accounts payable recorded?
Traditionally, accounts payable are recorded in a pen and paper-based ledger; however, with the emergence of digital accounting and financial reporting systems, it’s not unusual for businesses to adopt automated accounts payable systems. Automating the accounts payable can be extremely advantageous for the business because:
- It saves time: Manually entering all the invoice data can take up significant time for your financial teams, who must ensure accuracy and omit repeats each time they enter an amount in your record books. When you enter automation into the picture, the technology automatically ensures accuracy and omits repeats, so your financial teams can focus on other parts of the business.
- It is more accessible and safe: Paper documents can easily be misplaced or lost. When these documents are invoices issued by vendors, it’s naturally understood that the risk that can arise after losing them is paramount. With automated systems, it’s easier and safer to store invoices. This factor is especially important when you also have teams working remotely. Remote financial teams can easily access the data and fulfill their daily obligations.
Additionally, if you’d like to look at any past invoice, you wouldn’t have to dig through a pile of papers to reach your desired document. Type the name and number of the invoice in your accounting system, and you will have the invoice in front of your eyes in just a few seconds.
What did we learn?
Several types of accounts payable may surface in your ledger, with each demanding settlement within a year at most. To efficiently manage these financial obligations, upgrading to an automated system is important, which can help save time, improve productivity, and increase accessibility.