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The Process of Accounts Payable When an entity is obligated to pay a short-term debt to its creditors, after receiving goods or services in advance, this condition is referred to as accounts payable, and, in accounting, the amount of accounts payable is entered into under the heading current liabilities. Another way of understanding accounts payable is when a company orders and receives goods (or services) in advance of paying for them, that company is purchasing goods “on account” or “on credit.,” and the vendor’s bill or invoice will be recorded by the company in its liability account titled Accounts Payable. As soon as the vendor’s invoice is recorded, the amount representing accounts payable will be entered as credit and for it to be balanced, another account must be debited. The value of accounts payable is entered into the debit column and Cash will be credited when the account payable is paid, and, therefore, the credit balance in accounts payable becomes equal to the amount reflected in the vendor’s invoice which has already been recorded but have not been actually paid yet. Another common use of accounts payable is referred to a business department or division that is responsible for making payments owed by the company to suppliers and other creditors.
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Accounts payable are basically a short-term debt, but there are also other short-term business debts, which includes payroll costs, business income taxes and short-term loans. Long-term debts, on the other hand, are the following: lease payments, retirement benefits, individual notes payable and a range of other debts repaid over a long term.
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Trade payable is more long-term than accounts payable, because it refers to all the money a company owes the vendors for the business supplies and materials, which is included in the company’s inventory. Accounts receivables refers to the money that is owed to the company; therefore, the term is opposite in meaning to accounts payable. The following documents are a summary of details which must be reviewed thoroughly to ensure that only legitimate and accurate amounts are entered in the accounting system: purchase orders issued by the company, receiving reports issued by the company, invoices from the company’s vendors, contracts and agreements. The accuracy and completeness of a company’s financial statements are dependent on the accounts payable process, thus a well-run process must include the following: the timely processing of accurate and legitimate vendor invoices, accurate recording in the appropriate general ledger accounts, and the accrual of obligations and expenses that have not yet been completely processed. With business process automation or accounts payable automation software, the time needed to process an invoice has been drastically reduced in managing accounts payable and has helped a lot in the accurate reporting process. Another benefit of accounts payable automation software is that there won’t be any misplaced invoice anymore and payable is directed instantaneously and accordingly.