Accounts Payable Definition

What is Accounts Payable?

The accounts payable definition is: The record of all unpaid bill amounts owed to suppliers/vendors on any given date by a business. 

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

This account is always reported on the Balance Sheet under Liabilities and it represents the Accounts Payable Ledger. This Ledger contains a list of all the outstanding bills.

Accounts payable is part of the accrual method of bookkeeping.

Accounts Payable Definition and Information

Here are the steps from the time a business places an order to the time the bill is paid:-

1. The business opens an account with a supplier or vendor.
   
2. The business orders goods from the supplier or vendor.
   
3. The supplier or vendor 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 for payment, the business pays it.
   
8. The paid invoice is removed from the accounts payable list.

A bill that is payable is called an 'outstanding' bill.

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
  
• Sales tax if applicable
  

Go here for step by step procedures on reconciling and paying accounts payable.

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

• Date of invoice
  
• Amount of invoice
  
• Name of Supplier
  
• Due date of payment

The ledger will not show the details of items or services purchased. You can get these by clicking or 'drilling down' into the bill entry in the software.

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. 

A huge debt can kill a business.

A dissatisfied supplier/vendor 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 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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