What is accounts payable?

When managing your own business finances, you may have come across the phrase ‘accounts payable. This is a method of bookkeeping to monitor what your business owes. In this article, we’ll explain what accounts payable is and how it works in business by looking at the following areas:

• What is accounts payable?
• How does accounts payable impact my business?
• How does accounts payable work in practice?

Accounts payable refers to money that your business owes. 

This could be an invoice you have yet to pay to suppliers if you have a running contract for products or supplies with them. Or it could be to any creditors you owe, including car agencies for leasing or hiring any work vehicles, or companies you have contracted for work such as electrical maintenance or ad hoc repairs. Generally, your accounts payable items are things that do not accrue interest, like a bank loan. 

Your accounts payable counts as a liability for your business. Liabilities are effectively debts, and it is essential that you manage your liabilities effectively and responsibly as it could impact your business or your personal credit file if your debts are not repaid efficiently. Paying regularly and on time is not only respectful to your creditors, and can help you create lasting business relationships, but also helps build confidence in your business’ ability to repay what you owe.

On the other side, accounts receivable is any amount of money owed to you. This could be from a non-trade-related payment, such as a tax rebate or insurance payout, or by a customer or client that has not paid their bill for your services. It might also be money you are owed from a product purchase on credit (for example, if you offer store accounts, where they can buy now and pay later).

Be careful that you do not confuse accounts receivable with accounts payable when doing your business bookkeeping. To clarify, accounts receivable is money you are owed, and accounts payable is money that your business owes. 

It might help to think about accounts payable as a folder where all your own unpaid invoices or debts go until you pay them.

Let’s look at an example of how accounts payable works in a business setting.

Let’s say you are a sole trader running a bakery. On the 1st of March, you have to call out an engineer to fix your oven.

The tradesman you’ve contracted has to source some parts, then comes back and finishes fixing your oven on the 3rd of the month. They then issue you with an invoice.

This could be a paper invoice or a digital one. Many apps like Countingup allow businesses to automate a lot of admin to make it much easier to reconcile the invoices once paid. Check out Countingup to see if there may be a more effective way for you to manage paying and issuing invoices.

The legal requirement for invoice payment in the UK is within 30 days of the service/product being received. So in this example, you have 30 days from the 3rd of March to pay for the work you had carried out. 

You could pay straight away, but repairing a large bakery oven may cost a lot since it is such an important piece of equipment, and you might not have the cash flow available at that very moment. So in your bookkeeping records for that month, you include an entry in your accounts payable ‘account’ for the total cost of the job, dated from the 1st of March until you pay the invoice. 

You can use a simple spreadsheet to record your accounts payable and receivable and your cash flow.  By including everything in your record, you’ll be able to see when you have the cash flow available to pay the invoice. Keeping track of the money flow this way means you’ll clearly see your financial obligations as well as any money that you are still owed from customers, and you’ll be able to pull together financial reports together easily.

Next, total up your accounts receivable, and list these as current assets. You’ll then total up your accounts payable and list this within your liabilities. You may then have to use these figures in your business balance sheet and cash flow statements. Using reports and statements such as these regularly will help you to monitor the financial health of the business, and you will need to know your accounts payable to fully understand your debts.

Once you have sufficient cash flow available, you can then pay your oven invoice. 

Afterwards, you can then move the total cost out of your accounts payable and your liabilities balance, as the money will have been taken out of your business current account. 

Update your spreadsheet to reflect that the invoice has been paid, but you can keep the invoice number on your record in case you need to refer to it for VAT purposes later on. Having detailed records is very important to running your own business smoothly, and apps such as Countingup can help you gain a better understanding of your finances.

By setting up a Countingup business current account, you can manage all your financial data in one place. The app comes with free built-in accounting software that automates the time-consuming aspects of bookkeeping and taxes. You’ll receive real-time insights into your business finances, profit and loss reports, tax estimates, and the ability to create and send invoices in seconds.

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward!
Download the Countingup app to apply for your business current account in minutes. All you need is proof of ID and a selfie. Download the app here.