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Accounts payable
3 key takeaways
Copy link to section- Accounts payable represent money a company owes to suppliers.
- They are recorded as a current liability on the balance sheet.
- Managing accounts payable efficiently is crucial for maintaining good supplier relationships and cash flow.
What are accounts payable?
Copy link to sectionAccounts payable (AP) are amounts a company owes to its suppliers for goods and services purchased on credit. These obligations are typically short-term, meaning they are due to be paid within a year. Accounts payable are recorded on the balance sheet under current liabilities.
Managing accounts payable involves tracking invoices, ensuring timely payments, and maintaining good relationships with suppliers. Efficient management of AP helps a company maintain a positive credit rating and avoid late payment fees.
Importance of accounts payable
Copy link to sectionAccounts payable are essential for several reasons. They help businesses manage their cash flow by allowing them to pay for goods and services after they have been received. Proper management of AP ensures that a company maintains good relationships with its suppliers, which can lead to better payment terms and discounts.
Recording and monitoring accounts payable accurately is crucial for financial reporting and compliance. It provides a clear picture of a company’s short-term liabilities and helps in assessing its financial health.
How accounts payable work
Copy link to section- Receiving goods/services: A company receives goods or services from a supplier.
- Invoice recording: The supplier sends an invoice, which the company records as an account payable.
- Payment processing: The company schedules the payment according to the agreed terms, such as 30 days from the invoice date.
- Payment: The company pays the supplier, reducing the accounts payable balance.
Examples of accounts payable
Copy link to section- Purchasing inventory: A retailer buys inventory worth $10,000 on credit from a supplier, which is recorded as accounts payable until it is paid.
- Utility bills: A company receives a utility bill for $1,000, which it records as accounts payable until the bill is paid.
- Office supplies: An office purchases $500 worth of supplies on credit, creating an account payable until the payment is made.
Real-world application
Copy link to sectionConsider a manufacturing company that regularly purchases raw materials from suppliers on credit. Each time the company receives an invoice for these materials, it records the amount as accounts payable. The company’s accounting department tracks these invoices and schedules payments according to the agreed terms. By managing accounts payable efficiently, the company maintains a good relationship with its suppliers and ensures a steady supply of materials.
Understanding accounts payable is crucial for managing a company’s short-term liabilities and maintaining healthy cash flow. Effective AP management helps businesses build strong supplier relationships and improve their financial stability. For further insights, you might explore topics such as accounts receivable, cash flow management, and financial statement analysis.
More definitions
Sources & references

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