Accounts payable explanation
It is necessary to highlight its characteristic features explaining the term of accounts payable in simple words:
- acts as capital attracted from outside;
- has a contractual basis;
- occurs in commercial enterprises of any scale.
All these properties of accounts payable are equally important for understanding its essence.
The definition of accounts payable
Accounts payable refers to all debt obligations of an enterprise that arise as a result of entering into a transaction with counterparties or other participants in economic activity that remain unpaid at the time of the formation of accounting statements. This is an account payable definition.
Deadlines always justify the movement of accounts payable. Their compliance indicates the company’s solvency and the effectiveness of asset management.
The terms in the calculation of the commitments are important for several reasons:
- the frequency of certain payments is fixed at the legislative level (for taxes, mandatory contributions, and wages);
- the imposition of penalties, including penalties for late payment, leads to an increase in accounts payable;
- terms and periods are used to analyze the company’s economic activity for compliance or deviation from the norm.
Accounts payable are often divided into two types: short-term and long-term. Now, you know how to respond to “What are accounts payable?”.
The process of accounts payable
Accounts payable are calculated:
- during the preparation of financial statements;
- in order to find out the state of the enterprise activities and determine the ability to handle debt obligations;
- in order to select a management strategy.
The fact that there are accounts payable indicates that the date of occurrence of obligations (the day of delivery of goods, provision of services or performance of works by the creditor) does not match the date of payment. Since the presence of accounts payable is an unpleasant circumstance for business entities, everyone strives to write it off during accounts payable process.
If for some reason, the company is unable to pay the debt incurred as a result of the contract with the counterparty promptly, the obligation becomes “overdue.” Overdue debt is subject to write-off in cases where the authorized counterparty did not take active actions to enforce its recovery within the time limits established by law, or the debtor has other objective circumstances that make it impossible to perform the obligation.
Write-off of overdue accounts payable is a mandatory operation since it is recognized as a non-operating income of the company and is subject to taxation.
Obligations that the creditor did not claim within six years from the moment when such a right arose are subject to write-off in the debtor company. The procedure must meet all formal requirements, so the tax office does not have any complaints.
The procedure is as follows:
- determining the date when debt has “timed-out” and the creditor can no longer enforce the debt through the courts.
- preparation and presentation of a package of documents to the tax service:
- inventory report of accounts receivable and accounts payable;
- note explaining the reasons for the debt;
- accounting information on the results of the inventory;
- order of the head of the company to write off the debt from the balance sheet.
This procedure is mandatory and unchangeable, but do check with your local authorities to make sure you follow all the rules.