Accounts payable (AP) refers to an account in the general ledger (the record-keeping system for a company’s financials) that represents the credit currently owed by a company; its debts to suppliers and to lenders/creditors.
All owed amounts are shown as the accounts payable balance on the balance sheet of any given company, alongside your assets and liabilities.
Any increase or decrease on your AP from a prior account period appears on this cash flow statement, and credit on the AP should be paid close to the loan’s due date to maximize your business’ cash flow.
Like any payment, transactions from Accounts Payable are possible in a number of ways. Follow closely to figure out which method of payment will suit your business’ cash flow the best!
Types of Payments in Accounts Payable
The following list shows all the possible ways you can pay your suppliers:
This is the most common method used when paying invoices. It is also known as “cash accounting” because it involves making direct deposits into the bank account of the supplier.
The biggest advantage of using cash is that there is no paperwork involved- the money goes directly into the bank account.
However, if the supplier does not have access to a bank account, then they will need to receive a check instead.
Another very common method of payment is via checks; write out a check to your supplier and hand it over personally.
This method is usually used when you want to avoid using an electronic means of paying bills.
A bank draft is similar to a check but instead of writing a personal check, you send money directly into your bank account. You then use the funds to cover your bill.
Similar to a bank draft, a cashier’s check is a check written by a bank that allows you to draw on funds held at another bank. The other bank will hold the funds until you need them.
You can also settle payments with debit cards. Simply provide your card details to your creditor, and your bank will then charge the amount against your card.
The transaction is taken immediately and will appear on your monthly statements.
If you prefer to make payments electronically, you can do so through credit cards. Just like debit cards, you can simply provide your credit card information to your creditors and they will process the payment.
Unlike debit cards, however, credit cards allow you to take a certain amount of time before the money is debited from your account.
Electronic Fund Transfer (EFT)
An EFT is a way of transferring money between two parties without having to physically exchange paper checks.
Instead, the sender provides their banking details to the recipient who then transfers the money. You can set up automatic payments to your vendors through online banking software.
A wire transfer is a more secure form of sending money than EFTs. In this case, the sender sends a request to the receiving party via email or fax.
Once received, the receiver typically has about 48 hours to deposit the money into their bank account. If the money isn’t deposited within that time frame, the sender gets charged a fee.
How Do I Calculate My AP (Accounts Payable)?
AP is one of the most important parts of running a business. Without proper cash flow management, you could be losing thousands of dollars every month by failing to coordinate payments with a loan’s due date.
Here are some tips for calculating how much you owe:
- Summarize all the bills you haven’t yet paid.
- Determine which methods of payment you’ll use.
- Determine the total amount owed to each vendor.
- Include unpaid wages in your costs.
- Decide on what date you’re going to make each payment.
Frequently Asked Questions
What Is AP?
AP stands for Accounts Payable. It refers to any outstanding debts or liabilities that must be paid. These include salaries, rent, taxes, utilities, insurance premiums, loans, interest, etc.
What Is The Difference Between Accounts Payable And Accounts Receivable?
The main difference between Accounts Payable (AP), and Accounts Receivable (AR) is that AR is the opposite side of the coin.
This is incoming money owed to you for goods or a service provided, and is included among your assets. Both sides of the balance sheet represent assets and liabilities.
What Is Cash Flow?
Cashflow is the ability to pay your expenses on time. When you have enough money coming in to cover your expenses, you have positive cash flow.
When you don’t have enough money coming in, you have negative cash flow.
Why Do Businesses Have Accounts Payable?
Businesses have accounts payable because they want to pay out as little as possible.
They don’t want to spend too much money paying off their debts, but they also need to keep track of when bills need to be paid to avoid late fees and penalties.
Cash Flow is very important to businesses because it helps them manage their finances effectively.
How Can I Manage My AP?
Business owners should keep tabs on their accounts payable throughout the year.
Monthly reports will help you see where there might be problems, such as if you’ve missed a bill, or if you’re behind on payroll.
The best thing you can do is to stay on top of things so you won’t miss any deadlines.
What Should I Look For In An Accounts Payable System?
There are many different types of accounting systems available, from basic spreadsheets to complex ERP packages.
Some people prefer using a spreadsheet while others choose to use a dedicated program. Whatever system you decide to use, it needs to be able to handle multiple users, and it needs to provide accurate information.
You also need to consider whether you want to integrate your accounting software with other programs like Microsoft Office or QuickBooks.
In this guide, we have taken a look at the different types of payments in AP. We have also taken a look at other information that is related to this topic. So, if you want to find out more, check out the guide above.
Thanks for reading!
Paul Martinez is the founder of EcomSidekick.com. He is an expert in the areas of finance, real estate, eCommerce, traffic and conversion.
Join him on EcomSidekick.com to learn how to improve your financial life and excel in these areas. Before starting this media site, Paul built from scratch and managed two multi-million dollar companies. One in the real estate sector and one in the eCommerce sector.