Accounts payable represent money your business owes to vendors, suppliers, or service providers.
Accounts payable (AP) is one of the most important short-term liabilities on a company’s balance sheet. It represents money a business owes to suppliers and vendors for goods and services received on credit. Managing AP effectively is crucial for cash flow, financial health, and maintaining good supplier relationships.
This guide explains accounts payable in plain language, with examples, formulas, and practical insights for businesses and investors.
What Is Accounts Payable?
Accounts payable (AP) is the amount a company owes to its suppliers or creditors for purchases made on credit. It’s recorded as a current liability on the balance sheet because payment is usually due within 30–90 days.
Simple Example:
- A business buys office supplies worth $5,000 on credit.
- Until the bill is paid, the $5,000 appears under Accounts Payable on the balance sheet.
How Accounts Payable Works
When a company receives goods or services before making payment, the transaction creates a liability.
Accounting Journal Entry (when purchasing on credit):
Debit: Office Supplies (Asset) .......... $5,000
Credit: Accounts Payable (Liability) .... $5,000Journal Entry (when payment is made):
Debit: Accounts Payable (Liability) ..... $5,000
Credit: Cash/Bank (Asset) ............... $5,000This process ensures accurate financial reporting and cash flow tracking.
Accounts Payable vs Accounts Receivable
| Feature | Accounts Payable (AP) | Accounts Receivable (AR) |
|---|---|---|
| Definition | Money owed by the business | Money owed to the business |
| Balance Sheet Category | Current Liabilities | Current Assets |
| Example | Bills for raw materials, rent, etc. | Unpaid invoices from customers |
| Impact on Cash Flow | Outflow (payments to suppliers) | Inflow (collections from customers) |
Key Account Payable Metrics
1. Accounts Payable Turnover Ratio
This ratio measures how quickly a business pays its suppliers.
Formula:
AP Turnover = Total Supplier Purchases ÷ Average Accounts PayableExample:
- Purchases from suppliers = $600,000
- Beginning AP = $100,000
- Ending AP = $140,000
- Average AP = ($100,000 + $140,000) ÷ 2 = $120,000
AP Turnover = 600,000 ÷ 120,000 = 5This means the company pays suppliers 5 times per year.
2. Days Payable Outstanding (DPO)
Shows the average time (in days) a company takes to pay its suppliers.
Formula:
DPO = (Average Accounts Payable ÷ Cost of Goods Sold) × 365Advantages of
- Allows businesses to preserve cash by deferring payments
- Improves working capital management
- Can strengthen supplier relationships if paid on time
- Provides access to trade credit (interest-free financing)
Disadvantages
- Late payments can damage your edit rating
- High AP may signal cash flow problems
- Poor AP management risks supplier disputes
- Can distort liquidity ratios if not tracked carefully
Use Cases: Why Accounts Payable Matters
- Business Owners → Manage cash flow, avoid late fees, and maintain supplier trust.
- Accountants → Ensure accurate reporting and compliance.
- Investors → Analyze AP trends to assess liquidity and financial stability.
- Lenders → Use AP levels to evaluate creditworthiness.
FAQS
AP is a credit balance account (liability). When you record a new payable, you credit AP. When you pay it off, you debit AP.
It is a current liability on the balance sheet.
Unpaid rent, supplier invoices, or utility bills that a company has received but not yet paid.
AP refers to short-term trade credit, while loans payable are formal borrowings from banks or lenders.
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The Bottom Line
Accounts payable is more than just a line item; it’s a critical part of a company’s short-term financial health. Managing AP efficiently helps businesses preserve liquidity, maintain supplier trust, and avoid unnecessary costs.
Whether you’re a business owner, accountant, or investor, understanding account payable gives you deeper insight into a company’s cash flow and financial stability.
