What You Need To Know About Accounts Payable

 

What exactly is accounts payable (AP) and what do the entries entail? Essentially, it represents the obligation of a firm to pay off their debts to the respective creditors and suppliers in a stipulated timeframe. The failure to make these payments can result in your business defaulting. While the balance sheet is filled with lots of information and many sub categories, none of these categories can even be compared to the AP section. Here, you can manage the records of the money which you might owe any party that enables your business to continue operating. As an inexperienced business owner, it can be overwhelming to keep track of your accounts at the start.

Why is this Section So Important?

The accounts payable section in the books of your business is so important because it captures the short-term liabilities that you have to deal with. It is usually marked by IOUs from your business to an external entity. However, note that it is only credited when the invoices have been received. When these bills have been paid, then it will be debited. The account can be found under the current liabilities account on your company’s balance sheet. It is useful because it shows you the grand total of money that your business owes to lenders and vendors.

Common Trends

If you see that your accounts payable section seems to be growing larger, instead of shrinking, it means that your company is buying more items on credit. If this is the case, you should relook your business model and pay for things in cash, or reduce your spending to reduce the amount of debt. Conversely, if the opposite were to happen, you might be paying back your debt at an unsustainable rate. As such, having a firm grasp over the spending and returning habits of your company is important when you are optimizing the cash flow of your business.

How Can You Record Accounts Payable?

If you have chosen to use double-entry accounting for your business, you will need to account for an offsetting debit whenever you credit anything into the ledger. Recording your accounts payable is pretty simple. All you need to do is to credit the account every time your business gets a bill or an invoice. Once this is done, add a debit in order to offset the credit to balance your balance sheet. Typically, you will find that the expense account that is linked to the item you purchased on credit will be debited. Note that when you pay the bills, you need to debit it in your accounts payable. Doing so will help to decrease the current liabilities and will make your balance sheet more current. Balancing will require you to lower the cash balance for the same amount of money.

Five Bookkeeping Tips For Small Businesses

 

“Doing the books” is not something that comes naturally to most small business owners. However, it is one of those critical tasks that can make or break your business in the long run. If you don’t already have a robust system in place for tracking your everyday financials, then keep reading to learn the basics of bookkeeping services for small businesses:

Step 1: Choose a Bookkeeping Method

The single- and double-entry methods are the most commonly used bookkeeping methods with the former being ideal for a business that has a very simple structure and a low volume of activity.

Most business owners who use single-entry bookkeeping will record money as it comes in and out of the business in a simple spreadsheet, with a single entry for each transaction. However, it’s important to note that this method does not allow you to anticipate your cash flow needs as it does not track accounts like inventory, accounts payable or accounts receivable.

Step 2: Properly Categorize Transactions

Recording transactions in the appropriate account is one of the most fundamental principles for small businesses who use the double-entry method described above.

There are five account types:

1. Assets are resources owned by your business that can be measured and have value. Examples include cash, accounts receivables, inventory, land and equipment. Assets also include prepaid rent.

2. Think of Liabilities as the obligations of your business — amounts you owe to creditors. Liabilities usually have the word “payable” in their accounting entry. Some examples are: notes payable, accounts payable, interest payables and salary payable.

3. Equity is what is left over when you subtract your liabilities from your assets. In other words, rearranging the Balance Sheet equation* as follows:

Step 3: Track Accounts Receivable

More than likely, your business does not always collect payment the very instant you deliver a product or service to a customer. And without a strong accounts receivable system, you may run into cash flow problems very quickly. The accounts receivables management process must include:

• An efficient invoicing platform that allows you to bill customers quickly; and

• A robust collections system to follow up with late paying clients.

Step 4: Manage Accounts Payables

If you manage a large volume of bills and vendors, then you need to build an accounts payable platform to track your cash outflows. This is where virtual bookkeeping services come in handy to ensure your bills are paid on time and that you maintain good vendor relationships.

Step 5: Reconcile Your Accounts

Whether you use a bookkeeping program like Quickbooks, an Excel spreadsheet or just a good old fashioned ledger book, the ultimate goal of bookkeeping is to reconcile a trial balance, which means the final total of debits and credits must match.

Next Steps: Consider Outsourcing Your Small Business Bookkeeping Needs

For some business owners, keeping up with the steps described above might sound like a fun challenge; but for most, it sounds like a nightmare. If you fall into the latter category, the good news is that the team of experts at Remote Quality Bookkeeping can take these small business bookkeeping tasks off your plate so you can focus on forging a lasting competitive advantage in your industry.

Contact us today to see how we can help you save time and money with our small business bookkeeping solutions.