What Are Accounts Payable? A Simple Definition

Accounts payable (AP) represents the money a business owes to its suppliers and vendors for goods and services received on credit. These obligations are typically short-term, due within a year, often within 30 to 90 days. AP reflects a company’s commitments to external parties.

How Accounts Payable Originate

Accounts payable arise when a company receives goods or services before making a payment. This arrangement is a short-term credit extended by the supplier. For instance, when a business purchases inventory, office supplies, or obtains services like utilities or consulting and agrees to pay later, an accounts payable is created.

This system allows businesses to acquire necessary resources without immediate cash outlay. Examples include receiving an invoice for raw materials, a bill for internet services, or payment due to an independent contractor.

Recording and Tracking Accounts Payable

Managing accounts payable involves systematic processes to ensure obligations are met accurately and on time. Key documents include purchase orders, receiving reports, and vendor invoices. A purchase order (PO) details the goods or services, quantity, and agreed price. A receiving report confirms the arrival and condition of goods.

The vendor then sends an invoice, a formal request for payment. Accounts payable teams often perform a “three-way match,” comparing the purchase order, receiving report, and invoice to verify accuracy before payment is approved. This helps prevent errors. Obligations are recorded in an accounts payable ledger, which tracks individual vendor balances, due dates, and payment terms. The total accounts payable balance is reflected in the company’s general ledger.

Why Accounts Payable Matter

Accounts payable impact a business’s financial health and operational efficiency. They are classified as current liabilities on a company’s balance sheet, representing short-term debts due within one year. This offers insights into a company’s liquidity and its ability to meet immediate financial obligations.

Effective management of accounts payable directly influences a company’s cash flow. By timing payments within agreed-upon terms (e.g., 30 to 90 days), businesses can optimize cash on hand for other operational needs or investments. Maintaining good relationships with suppliers through timely payments can lead to favorable credit terms and potential discounts. Conversely, poor accounts payable management can result in late fees, strained supplier relationships, and disruptions to the supply chain.