Accounts payable (AP), or “payables,” are Business Terms that define as a company’s short-term debts to creditors or suppliers. A company’s current liability is payables.
Another less common use of “AP” is the business department or division that pays suppliers and other creditors.
Accounts receivable and payable are comparable.
Key takeaways
Accounts payable (AP) are unpaid vendor or supplier invoices.
The company’s accounts payable balance shows all vendor debts.
Cash flow statements show total AP changes from the previous period.
Management may pay its bills as soon as possible to boost cash flow.
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How to Understand Payable Accounts (AP)
A company’s current liabilities section will show its total accounts payable. Paying accounts payable on time avoids default. Short-term supplier payments are AP at the corporate level. Payables are short-term IOUs from one business to another. The other party added the same amount to its accounts receivable.
A balance sheet’s AP is crucial. If AP rises, the company is buying more on credit. A company’s AP decreases when it pays off prior period obligations faster than it buys new items on credit. Cash flow management requires accounts payable management.
The indirect cash flow statement shows the net change in AP from the prior period in the top section and cash flow from operating activities. Management can manipulate cash flow with AP. For instance, management can delay AP payments to boost cash reserves.
However, the company’s vendor relationships must be considered when paying later. Paying bills on time is good business.
Tracking Accounts Payable
All general ledger entries must have an offsetting debit and credit in double-entry bookkeeping. When invoices arrive, the accountant credits accounts payable. This entry debits a credit purchase expense account. The debit could go to an asset account if the item were capitalizable. The accountant debits accounts payable to reduce liability after paying the bill. Crediting the cash account reduces the cash balance.
A business receives a $500 office supply invoice. When the invoice arrives, the AP department credits accounts payable and debits office supply expenses of $500. Even though cash has not been paid out, the company has recorded the $500 office supply expense debit on the income statement. Accrual accounting recognizes expenses when incurred, not when cash changes hands. After the company pays the bill, the accountant credits cash and debits accounts payable by $500.
A company may owe many vendors. Accounts payable lists vendor payments are due. Thus, the accounts payable balance shows the total amount owed to vendors and short-term lenders. The balance sheet shows the total. The business above would have $550 in accounts payable before paying off a $50 lawn care invoice.
Trade vs. Accounts Payable
“Accounts payable” and “trade payables” are similar but not the same. Trade payables are payments to vendors for inventory-related goods like business supplies and materials. Short-term company obligations are accounts payable.
Those items are inventory and trade payables if a restaurant owes a food or beverage company. Accounts payable include the restaurant’s uniform cleaner’s obligations. Many companies combine these categories under accounts payable.
Payable vs. Receivable
AR and AP are opposed. Accounts receivable is money owed to the company by customers, while accounts payable is money owed to vendors. One company records an entry to accounts payable and the other to accounts receivable when transacting on credit.
What are a few examples of payables?
When a company owes services or products, it creates a payable. This can be a credit purchase, subscription, or installment payment after receiving goods or services.
Find a Company’s Accounts Payable?
Accounts payable are a current liability on a company’s balance sheet because they are owed money.
Payables versus Accounts Receivable?
Receivables are assets that the firm receives for services. However, accounts payable are the company’s debts—supplier or creditor payments. Payables are liabilities.
Are accounts payable—business expenses?
No. Accounts payable are not a company’s core operating expenses, as some people think. Payables are liabilities on the balance sheet and expenses on the income statement.
Bottom line
Accounts payable (AP) are a company’s short-term obligations. AP is a current liability on the balance sheet. Supplier invoices, legal fees, and contractor payments are typical payables.
