Payables

Understanding Payables in Accounting

What Are Payables?
"Payables" is a word used in accounting and business. It means money that you owe to other people or companies. It is money you must pay in the future.

The word comes from "pay" + "able." Payable means "able to be paid" or "must be paid."
When a business has payables, it means the business bought something or received a service, but hasn't paid for it yet. The business will pay later.

Think of it like this: You go to a restaurant with a friend. You eat dinner. Your friend pays for your meal. Now you owe your friend money. This is similar to a payable. You received something (the meal), but you must pay for it later.

Another Name: Accounts Payable
In accounting, payables are often called "Accounts Payable" or "A/P" for short.
Accounts Payable are amounts the business owes to suppliers, vendors, or other companies. These are bills that need to be paid.

Common Examples of Payables

Let's look at some everyday examples:
Example 1: Buying Supplies A bakery orders flour from a supplier. The supplier delivers the flour on Monday. The bakery receives an invoice (a bill) for $500. The invoice says "Payment due in 30 days."
The bakery now has a payable of $500. They received the flour, but they will pay for it in 30 days.

Example 2: Using Services An office uses electricity every day. At the end of the month, the electricity company sends a bill for $200. The office must pay within 15 days.
This $200 electricity bill is a payable. The office used the electricity, but hasn't paid yet.

Example 3: Buying Equipment A restaurant buys a new refrigerator for $3,000. The supplier says, "You can pay us next month."
The restaurant has a payable of $3,000. They have the refrigerator now, but they will pay next month.

Why Do Businesses Have Payables?
You might wonder: why don't businesses just pay immediately?

There are several good reasons:
It helps with cash flow. Businesses can keep their cash longer. They can use the money for other important things before paying the bill.

It's normal business practice. Most suppliers give customers 30, 60, or even 90 days to pay. This is called "credit terms."

It helps manage money better. A business might receive payment from customers first, then use that money to pay suppliers.

It builds business relationships. When suppliers trust you to pay later, it creates good relationships.
It's convenient. Paying all bills at once at the end of the month is easier than making many small payments every day.

How Payables Work: A Complete Example

Let's follow a complete example from start to finish.
Green Garden Shop sells plants and flowers.
Day 1 (March 1): Green Garden orders 100 plants from a supplier called "Plant World." The total cost is $1,000. Plant World says, "Pay within 30 days."

Day 2 (March 2): Plant World delivers the 100 plants. They also give Green Garden an invoice for $1,000.
What happens in the accounting books:

• Green Garden received plants worth $1,000
• Green Garden now has a payable (debt) of $1,000 to Plant World
• The accountant writes in the accounts: "Accounts Payable: $1,000"

Day 25 (March 25): Green Garden has sold many plants. They have cash now. They decide to pay Plant World.

What happens:
• Green Garden pays $1,000 to Plant World
• The payable disappears
• The accountant writes: "Accounts Payable: $0" (or removes the entry)

The cycle is complete. Green Garden received goods, had a payable for some time, then paid it.
Payables on the Balance Sheet
The Balance Sheet is an important financial document. It shows:
• What a company owns (Assets)
• What a company owes (Liabilities)
• The company's value (Equity)
Payables are liabilities. A liability is something you owe. It's a debt.

On a Balance Sheet, you might see:
Liabilities:
• Accounts Payable: $5,000
• Bank Loan: $20,000
• Taxes Payable: $2,000

The Accounts Payable line shows all the money the company owes to suppliers.

Types of Payables
There are different types of payables:
1. Trade Payables (Accounts Payable)
These are the most common. Trade payables are money owed to suppliers for goods or services used in normal business operations.
Examples:
• Money owed to suppliers for inventory
• Money owed for office supplies
• Money owed for raw materials

2. Expense Payables
These are bills for services the company used.
Examples:
• Electricity bills
• Water bills
• Internet bills
• Rent
• Phone bills

3. Wages Payable
This is money the company owes to employees for work they've already done.
Example: Employees work during March. The company pays salaries on April 5th. From March 31st to April 5th, the company has "Wages Payable."

4. Taxes Payable
This is tax money the company owes to the government.
Example: A company owes $3,000 in sales tax. They haven't paid it yet. This is "Taxes Payable."

5. Interest Payable
This is interest on loans that hasn't been paid yet.
Example: A company has a bank loan. Every month, they owe $500 in interest. If they haven't paid this month's interest yet, they have "Interest Payable" of $500.

Payment Terms
When businesses buy on credit, there are payment terms. These terms say when payment is due.

Common payment terms:
Net 30: Pay within 30 days Net 60: Pay within 60 days
Net 90: Pay within 90 days Due on receipt: Pay immediately when you receive the invoice 2/10 Net 30: Get 2% discount if you pay within 10 days, otherwise pay full amount within 30 days

Example of Discount Terms
A company receives an invoice for $1,000. The terms are "2/10 Net 30."
Option 1: Pay within 10 days
• Discount: 2% of $1,000 = $20
• Amount to pay: $1,000 - $20 = $980
• Savings: $20

Option 2: Pay between day 11 and day 30
• No discount
• Amount to pay: $1,000
• Savings: $0

Smart businesses often pay early to get discounts. Saving $20 on a $1,000 bill is good!

Managing Payables
Good businesses manage their payables carefully. This is called "Accounts Payable Management."
Why Is This Important?

Maintain good relationships: If you always pay late, suppliers might not want to work with you.
Avoid late fees: Many suppliers charge extra money if you pay late.

Keep good credit rating: Businesses have credit scores, like people. Paying on time keeps your score high.
Take advantage of discounts: Paying early can save money.

Plan cash flow: Knowing when payments are due helps you manage your money better.

Example: Poor Payables Management
Bad Example:
Mike's Restaurant has the following payables:
• Supplier A: $2,000 due March 15 (Mike forgets)
• Supplier B: $1,500 due March 20 (Mike forgets)
• Supplier C: $800 due March 25 (Mike forgets)
Mike doesn't pay attention to due dates. All suppliers charge him late fees. Supplier A gets angry and stops delivering food to his restaurant.
Result: Mike loses money on late fees AND loses a good supplier.
Example: Good Payables Management

Good Example:
Sara's Café has the following payables:
• Supplier A: $2,000 due March 15
• Supplier B: $1,500 due March 20
• Supplier C: $800 due March 25
Sara keeps a calendar. She marks all payment due dates. She pays Supplier A on March 10 (5 days early) and gets a 2% discount ($40 savings). She pays Supplier B on March 19 (on time). She pays Supplier C on March 24 (on time).
Result: Sara saves money, maintains good relationships, and avoids problems.

The Accounts Payable Process
Most businesses follow these steps:
Step 1: Purchase Order The company decides to buy something. They send a purchase order to the supplier.
Step 2: Receive Goods/Services The supplier delivers the goods or provides the service.
Step 3: Receive Invoice The supplier sends an invoice (bill).
Step 4: Verify Invoice The company checks that:
• They actually received the goods
• The quantity is correct
• The price is correct
Step 5: Record Payable The accountant records the payable in the accounting system.
Step 6: Schedule Payment The company plans when to pay based on the due date and their cash availability.
Step 7: Make Payment The company pays the supplier by check, bank transfer, or other method.
Step 8: Record Payment The accountant records that the payable has been paid.

Payables vs. Receivables
It's important to understand the difference:
Payables (Accounts Payable): Money YOU owe to others Receivables (Accounts Receivable): Money others owe to YOU
They are opposites!

Example
Situation: Coffee Shop buys coffee beans from Bean Supplier.
From Coffee Shop's perspective:
• Coffee Shop owes money to Bean Supplier
• This is a PAYABLE for Coffee Shop
• Coffee Shop records: Accounts Payable $500
From Bean Supplier's perspective:
• Coffee Shop owes Bean Supplier money
• This is a RECEIVABLE for Bean Supplier
• Bean Supplier records: Accounts Receivable $500
One company's payable is another company's receivable!

A Day in the Life: Accounts Payable Clerk

Let's see what an Accounts Payable Clerk does:
Morning:
• Check emails for new invoices
• Open mail and collect paper invoices
• Enter 5 new invoices into the computer system
• Total new payables today: $8,500
Midday:
• Review invoices due this week
• Check if there are any discounts available for early payment
• Prepare a list of payments to make
• Get manager's approval for payments
Afternoon:
• Process 10 payments (total: $15,000)
• Send payment confirmations to suppliers
• Update the accounting system
• File paid invoices
End of day:
• Prepare a report showing:
o Total payables: $45,000
o Payments made today: $15,000
o New payables today: $8,500

This clerk helps the company manage money and maintain good supplier relationships.

Real Business Example
Let's look at a realistic monthly scenario:
TechFix Company repairs computers. Here's their March activity:
March 5: Buy computer parts from Supplier A: $2,000 (due April 5)
March 8: Receive electricity bill: $300 (due March 25)
March 12: Buy office supplies: $150 (due April 12)
March 15: Pay February's rent: $1,200
March 20: Buy more computer parts from Supplier B: $1,500 (due April 20)
March 25: Pay electricity bill: $300
March 30: Receive March rent bill: $1,200 (due April 10)
Total Payables at end of March:
• Supplier A: $2,000
• Office supplies: $150
• Supplier B: $1,500
• Rent: $1,200
• Total: $4,850
TechFix must pay this $4,850 in April. This amount appears on their March 31 Balance Sheet under "Accounts Payable: $4,850"

Why Accurate Payables Records Are Important
Keeping accurate payables records is essential:
For financial statements: Payables must be correctly shown on the Balance Sheet.
For cash flow planning: The company needs to know how much they must pay and when.
For tax purposes: Some payables (like taxes payable) are very important for tax calculations.
For audits: If the company is audited, auditors check payables carefully.
For business decisions: Managers need accurate information to make good decisions.
For supplier relationships: Accurate records help ensure suppliers are paid correctly and on time.

Conclusion
Payables, or Accounts Payable, are amounts a business owes to others. They are liabilities - debts that must be paid in the future.
Payables are a normal part of business. They help companies manage cash flow and build relationships with suppliers.

Good payables management means:
• Keeping accurate records
• Paying on time
• Taking advantage of discounts
• Maintaining good supplier relationships

Understanding payables is essential for anyone working in accounting or business. Whether you're recording invoices, making payments, or reading financial statements, you need to understand what payables are and how they work.

Remember: Payables are what you owe. Receivables are what others owe you. Don't confuse them!
The next time you see "Accounts Payable" on a Balance Sheet, you'll know exactly what it means: money the company needs to pay to its suppliers and creditors.
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Comprehension Questions
1. What are payables? Explain in your own words.
2. Give three examples of payables that a business might have.
3. Why are payables also called "liabilities"?
4. A company buys supplies for $800 on March 1st. The payment is due on April 1st. When does the payable appear in the accounting records?
5. What is the difference between payables and receivables?
6. If an invoice says "Net 30," what does this mean?
7. An invoice is for $500 with terms "2/10 Net 30." If a company pays within 10 days, how much will they pay?
8. True or False: Payables appear on the Balance Sheet under "Assets." Explain your answer.
9. Why is it important for businesses to manage their payables carefully? Give at least two reasons.
10. Coffee Bean Company delivers coffee to Café Morning. Café Morning will pay next month. From Café Morning's perspective, is this a payable or a receivable?
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Answer Key
Answers to Payables Questions:
1. What are payables? Explain in your own words.
- Payables are money that a business owes to other people or companies. They are amounts that must be paid in the future. When a business receives goods or services but hasn't paid for them yet, this creates a payable.
2. Give three examples of payables that a business might have.
- Money owed to suppliers for inventory or supplies
- Electricity or utility bills that haven't been paid yet
- Wages owed to employees
- Rent owed to landlord
- Taxes owed to government (Any three of these answers is correct)
3. Why are payables also called "liabilities"?
- Because a liability is something you owe - a debt or obligation. Payables are amounts the business must pay in the future, so they are liabilities.
4. A company buys supplies for $800 on March 1st. The payment is due on April 1st. When does the payable appear in the accounting records?
- On March 1st (or March 2nd when the invoice is received). The payable is recorded when the company receives the goods or services, not when they pay for them.
5. What is the difference between payables and receivables?
- Payables are money YOU owe to others (what you must pay).
- Receivables are money others owe to YOU (what you will receive).
- They are opposites. One company's payable is another company's receivable.
6. If an invoice says "Net 30," what does this mean?
- It means the payment is due within 30 days. You must pay the full amount within 30 days of receiving the invoice.
7. An invoice is for $500 with terms "2/10 Net 30." If a company pays within 10 days, how much will they pay?
- They will pay $490
- Calculation: 2% discount = 2% of $500 = $10
- Amount to pay = $500 - $10 = $490
8. True or False: Payables appear on the Balance Sheet under "Assets." Explain your answer.
- False. Payables appear under "Liabilities," not "Assets."
- Assets are things you own. Liabilities are things you owe. Payables are debts (things you owe), so they are liabilities.
9. Why is it important for businesses to manage their payables carefully? Give at least two reasons.
- To maintain good relationships with suppliers
- To avoid late fees or penalties
- To keep a good credit rating
- To take advantage of early payment discounts
- To plan cash flow properly
- To avoid losing suppliers who might stop working with them (Any two of these answers is correct)
10. Coffee Bean Company delivers coffee to Café Morning. Café Morning will pay next month. From Café Morning's perspective, is this a payable or a receivable?
- From Café Morning's perspective, this is a PAYABLE.
- Café Morning received the coffee but hasn't paid yet. They owe money to Coffee Bean Company, so it's a payable (a liability) for Café Morning.
- (Note: From Coffee Bean Company's perspective, it would be a receivable.)