What is Accounts Payable (AP) – Explanation

What-is-Accounts-Payable

Accounts Payable (AP) means that amount which will be payable to the vendor/Supplier against the credit purchase of goods and services from them. At the end of the financial year, the total amount of AP is shown on the balance sheet under the group of Current Liabilities. 

Normally, AP is also known as Trade Payable, But AP is the part of Trade Payable. Trade Payable also include Promissory Notes Payable. So, we can divide Trade Payable into two major types.These are shown below:

  1. Accounts Payable
  2. Promissory Notes Payable

1. Accounts Payable: 

AP is that amount of payables which has no maturity date. it will pay after 1 week or after 1 year, it depends on the avilability of the funds.

2. Promissory Notes Payable: 

Promissory Notes Payable is that amount of Payable which has a maturity date. It will has to be paid on the maturity date in full. If business fail to pay the due amount of Bills payables then business has to pay some addition charges to the vendor/supplier. Bills Payable is the main example of Promissory Notes Payable.

Examples of Accounts Payable: –

A&B Co. Purchase goods to the C&D co. worth Rs 1,00,000 on credit. So, C&D Co. is now become a account Payable for the A&B Co. till the date of payment.

Benefits of Accounts Payable: –

AP provides a lot of benefits to the business. It plays a vital role in the growth of the business because it is the part of current liabilities. So, current liabilities use while calculating the liquidity ratio of the business. AP shows that the business will pay that amount in future. 

Placement of a Accounts Payable in the balance sheet: –

The placement of a Accounts Payable in the balance sheet should shown under the group Current Liabilities. These are shown in the following format of the balance sheet and highlighted with orange colour:

Name of the Entity
Balance Sheet as on 31st March, _______
Liabilities  Amount Assets  Amount 
Current Liabilities    Current Assets   
Trade Creditors    Cash in hand   
Bills Payable    Cash at Bank  
Outstanding Expenses    Inventories   
Advance/Unearned Incomes   Bills payable   
Short term loans    Sundry Debtors   
Non-Current Liabilities    Prepaid Expenses   
long terms loans   Accrued Incomes   
Debentures    Fixed/Non-Current Assets  
Capital   Building   
Add:  Net profit    Land   
   interest on Capital
  Plant & machine   
Less:  Drawings    Furniture & fixture   
   Net Loss    Goodwill   
       
     

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