Accounting Concept of Accounts Payable (AP) / Liability Accounting

AP is the amount due by an organization to its vendors for products and/or services procured on credit. AP is classified as a liability account.

Example: To supply auto parts to General Motors (GM), Delphi procured some goods worth $50,000 from ABC Corp. Delphi made a payment worth $30,000 through a check to ABC Corp. The remaining payment of $20,000 is to be paid to ABC Corp. after a month. The $20,000 is owed by Delphi for the goods supplied by ABC Corp., this amount will reflect as payables in the books of accounts of Delphi.

Not only does the AP process have an impact on the financial liability and credibility of the organization, it also has an impact on the working capital of the organization.

For any organization, the significance of every overdue payment can be greatly magnified.

For this reason, it is essential for all organizations to deal with the AP side of the business ledger in an effective manner. Bills that are unpaid or not addressed on time can snowball into major credit problems, which can easily cripple a business’s ability to function.

By making informed projections and sensible provisions in advance, the business can head off many credit problems before they get too big. Therefore, we see that the process of AP is very important to the financial health of any organization.

Account Payable

IMPORTANCE OF ACCOUNTS PAYABLE MODULE

Ensures accurate & timely payment to the correct vendor

Provides inputs for General Ledger reconciliation and closing of accounts / Finance books, on monthly & quarterly basis.

Earns discount for the business if we pay the invoice within the discount term.

Contributes to Current assets and Current liabilities in the Balance sheet.

Prevents immediate cash outflow from the business  as the purchase is on credit.