Accounts payable are the expenses recognized on the liability side when purchases are made on credit. These are ongoing company expenses and are short term debts to be paid within 1 year so as to avoid default.
Accounts payable is the total amount of short-term obligations or debt a company has to pay to its creditors for goods or services bought on credit. Accounts payable is the result of purchases made on credit.
Accounts payable form the largest portion of the current liability section on the company’s financial statements.
It represents the purchases that are unpaid by the enterprise. In the cash conversion cycle, companies match the payment dates with accounts receivables making sure that receipts are made before making the payments to the suppliers.
Lower the accounts payable days the better. It reflects that the company is able to realize the cash in good fashion.
Let’s take an example:
Davidson company makes purchases worth USD 1 million on December 1 with 60 days payment terms. Now at the end of the current financial year, the company shall recognize USD 1 million as accounts payable.
Now the question is that Davidson company has made similar purchases through various suppliers. These various accounts are grouped as they have the same characteristics and nature being short term liability originating from purchases of goods unpaid.
They are to be grouped as “Accounts Payable”.
Presentation in Trial Balance
Accounts payable is current liability by nature as it is short term debt and obligation is to be paid within 12 months. Hence, being liability it is to be shown on the credit side of the balance sheet.
|Plants and machinery||XX|
|Reserves and surplus||XX|