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Accounts Payable

What is Accounts Payable?

Accounts payable are the amounts owed by a firm to creditors for services or goods purchased. If a store receives goods in advance of paying for them, the purchase goes in the accounts payable file. Accounts payable may be for stock, services or utilities.

How do Accounts Payable Work for Business?

A store, for example a hardware store, will purchase stock in order have it for sale on the shelves.  The store will receive the stock in advance and payment due will go into the accounts receivable file. The same is also true of power and other utilities. The store will use electricity and pay for it the following period, when receiving the bill from the power company. Without running credit facilities with suppliers, it may be very difficult for the store to operate; the store will need to pay for all goods and services in advance or on receiving them, putting pressure on the cash flow of the business.  

A store may run a long list of entries in the accounts receivable file, once agreeing credit terms with its suppliers. On receiving the invoice, the store will confirm it against a purchase order and that the goods are in the store’s possession.  The store will record the invoice in the accounts payable file. By looking at the file, they will be able to verify invoices against the orders of the store, know that they are correct and when to pay them on time. On paying a creditor the store will deduct the amount from the accounts payable file and mark the bill as paid.

Importance of Accounts Payable

By running an accurate accounts payable file, the store will avoid losing track of payments, not pay an invoice twice or get a nasty shock when a number of unexpected bills fall due at the same time. On looking at the accounts payable file the storeowner should see money owed and keep track of all bills due over a period of time. The total amount owed on the accounts receivable should match the total from creditor invoices. If not, an invoice amount may not be correct or even payment already made without recording it on the accounts payable file.

The store may be in danger of missing payments if does not keep an accurate accounts payable file. A store that does not pay invoices on time may find credit facilities suspended, shortened or find them difficult to agree in any future negotiation of terms.

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