Accounts Payable (AP)

By 
ALICIA TUOVILA
 
 
Reviewed by 
DAVID KINDNESS
 
 
Updated Feb 24, 2021
What Are Accounts Payable (AP)?
Accounts payable (AP) is an account within the general ledger that represents a
company's obligation to pay off a short-term debt to its creditors or suppliers.
Another common usage of "AP" refers to the business department or division that
is responsible for making payments owed by the company to suppliers and other
creditors.

KEY TAKEAWAYS

 Accounts payable are amounts due to vendors or suppliers for goods or

services received that have not yet been paid for.
 The sum of all outstanding amounts owed to vendors is shown as the
accounts payable balance on the company's balance sheet.
 The increase or decrease in total AP from the prior period appears on the
cash flow statement.
 Management may choose to pay its outstanding bills as close to their due
dates as possible in order to improve cash flow.
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Accounts Payable

Understanding Accounts Payable

A company's total accounts payable (AP) balance at a specific point in time will
appear on its balance sheet under the current liabilities section. Accounts
payable are debts that must be paid off within a given period to avoid default. At
the corporate level, AP refers to short-term debt payments due to suppliers. The
payable is essentially a short-term IOU from one business to another business or
entity. The other party would record the transaction as an increase to
its accounts receivable in the same amount.
Accounts payable (AP) is an important figure in a company's balance sheet. If AP
increases over a prior period, that means the company is buying more goods or
services on credit, rather than paying cash. If a company's AP decreases, it
means the company is paying on its prior period debts at a faster rate than it is
purchasing new items on credit. Accounts payable management is critical in
managing a business's cash flow.

When using the indirect method to prepare the cash flow statement, the net
increase or decrease in AP from the prior period appears in the top section,
the cash flow from operating activities. Management can use AP to manipulate
the company's cash flow to a certain extent. For example, if management wants
to increase cash reserves for a certain period, they can extend the time the
business takes to pay all outstanding accounts in AP. However, this flexibility to
pay later must be weighed against the ongoing relationships the company has
with its vendors. It's always good business practice to pay bills by their due
dates.

Recording Accounts Payable

Proper double entry bookkeeping requires that there must always be an
offsetting debit and credit for all entries made into the general ledger. To record
accounts payable, the accountant credits accounts payable when the bill
or invoice is received. The debit offset for this entry is typically to
an expense account for the good or service that was purchased on credit. The
debit could also be to an asset account if the item purchased was a capitalizable
asset. When the bill is paid, the accountant debits accounts payable to decrease
the liability balance. The offsetting credit is made to the cash account, which also
decreases the cash balance.

For example, imagine a business gets a $500 invoice for office supplies. When
the AP department receives the invoice, it records a $500 credit in accounts
payable and a $500 debit to office supply expense. The $500 debit to office
supply expense flows through to the income statement at this point, so the
company has recorded the purchase transaction even though cash has not been
paid out. This is in line with accrual accounting, where expenses are recognized
when incurred rather than when cash changes hands. The company then pays
the bill, and the accountant enters a $500 credit to the cash account and a debit
for $500 to accounts payable.

A company may have many open payments due to vendors at any one time. All
outstanding payments due to vendors are recorded in accounts payable. As a
result, if anyone looks at the balance in accounts payable, they will see the total
amount the business owes all of its vendors and short-term lenders. This total
amount appears on the balance sheet. For example, if the business above also
received an invoice for lawn care services in the amount of $50, the total of both
entries in accounts payable would equal $550 prior to the company paying off
those debts.

Accounts Payable vs. Trade Payables

Although some people use the phrases "accounts payable" and "trade payables"
interchangeably, the phrases refer to similar but slightly different situations.
Trade payables constitute the money a company owes its vendors for inventory-
related goods, such as business supplies or materials that are part of the
inventory. Accounts payable include all of the company's short-term debts or
obligations.

For example, if a restaurant owes money to a food or beverage company, those

items are part of the inventory, and thus part of its trade payables. Meanwhile,
obligations to other companies, such as the company that cleans the restaurant's
staff uniforms, falls into the accounts payable category. Both of these categories
fall under the broader accounts payable category, and many companies combine
both under the term accounts payable.

Accounts Payable vs. Accounts Receivable

Accounts receivable and accounts payable are essentially opposites. Accounts
payable is the money a company owes its vendors, while accounts receivable is
the money that is owed to the company, typically by customers. When one
company transacts with another on credit, one will record an entry to accounts
payable on their books while the other records an entry to accounts receivable.

Frequently Asked Questions

What Are Examples of Payables?
A payable is created any time money is owed by a firm for services rendered or
products provided that has not yet been paid for by the firm. This can be from a
purchase from a vendor on credit, or a subscription or installment payment that is
due after goods or services have been received.

Where Do I Find a Company's Accounts Payable?

Accounts payable are found on a firm's balance sheet, and since they represent
funds owed to others they are booked as a current liability