Liability is basically an obligation that needs to be paid off, it is money owed to some other person. This kind of obligation is paid off either in cash or kind. Please note that while maintaining your books of accounts, you will have to follow and fulfill some compliance as per the procedures manual that has been recommended by your government.
About Accounts Payable
An accounts payable is a kind of liability that is incurred by any business firm, and is either repaid in a lump sum or installments that span over a certain time period. All liabilities are not accounts payable. For the sake of understanding, let us suppose that there are two kinds of liabilities, namely internal and external.
Internal ones would include, salaries of the employees, dividend of the shareholders and share capital or capital of the company itself.
The external liabilities would include the payments of the vendor, loans and all advances, expenditures such as power supply bills and fuel charges. Thus external liabilities tend to be accounts payable. In some cases though the internal liabilities are also considered to be accounts payable.
Which accounts are to be considered as internal or external depends upon the business organization. The internal liabilities are more recurring in nature such as salaries and power bills. The accounts payable tend to recur in the short run, unlike other internal liabilities such as salaries that recur throughout the lifetime of the business organization.
There are certain accounting standards and policies for accounts payable. Small procedures will differ from business to business, and the practicalities of the same are bound to be a bit different as per the nature of the business, the end results are however somewhat the same.
In simple language accounts payable can be defined to be the money that company owes to its creditors, vendors and bankers and appear on the current liability section of the balance sheet.
Common Accounts Payable Procedures
There are there types of account payable that are usually found in business organizations, these include, capital payments, bills payable and payments to creditors. The nature of all these transactions are a bit different and also the procedures are different for each.
In a company, capital investments include mammoth budgets for purchase of machinery, additional land, plant, etc. The finances for these investments are usually raised through secured loans. The accounts department usually makes a provision in funds such as mutual funds or collective investment schemes whose investment amount equals the amount of machinery.
The returns over investments and the periodic returns are used as installments for the secured loan. The installment is recorded in the cash book and also the loan account, in the bookkeeping procedure. These assets account for the largest monetary value in the inventory, which is clearly indicate in most of the financial statements.
Often it so happens that the company orders some items in the inventory but is quite unable to pay at the moment. In such cases, negotiable instruments are drawn on the company, which promise to repay the said suppliers a specified interest along with the actual sum.
Bills payable can be drawn on virtually any person and company, which cater to the business. Bills payable are current liabilities and in the books of accounts, they are recorded in the cash book and the bills payable account. They also appear in the balance sheet under a separate subhead.
Creditors are suppliers to the inventory who supply the company on a regular and recurring basis. An advantage of most of the creditors is that they usually do not charge interest or in cases where they charge interest, the rate is quite small. Creditors are recorded in a separate account, and in the books of accounts during repayment.
Of all the procedures, the capital repayment is the most complicated one as most creditors and bills are paid off with the inflow of revenue in the business.
These procedures are governed by certain international accounting standards, and by some specified regional laws, which a business firm needs to adhere to.