Accounts payable

Definition

Accounts payable refers to the amount of money a business owes to its creditors or suppliers for goods and services they have provided.

What is accounts payable?

It is a liability on the company’s balance sheet and represents short-term debts that need to be paid off within a specific time frame, often referred to as the payment terms. This typically involves invoices received from vendors, suppliers, and service providers. Businesses need to manage their accounts payable effectively to ensure timely payments and maintain good relationships with their suppliers.

Example of accounts payable

1. Purchase on credit:
   • On March 1st, ABC Office Supplies purchased office furniture on credit from XYZ Furniture Store, with a total cost of £10,000.

   The accounting entry for this transaction is:

   $\text{Office Furniture}(Asset)=\; \pounds 10,000$

   $\text{Accounts Payable}(Liability)=\; \pounds 10,000$

   This entry reflects an increase in the office furniture asset and an increase in the accounts payable liability.

2. Payment within credit terms:
   • The credit terms specify that ABC Office Supplies has 30 days to pay the invoice.
   • On March 25th, within the credit period, ABC makes a payment of £10,000 to XYZ Furniture Store.

   The accounting entry for the payment is:

   $\text{Accounts Payable}(Liability)=\; \pounds 0$

   $\text{Cash}(Asset)=\; \pounds 10,000$

   This entry reduces the accounts payable liability and decreases the cash asset to reflect the payment made.

In this example, Accounts Payable initially represents the amount owed to the supplier for the purchased office furniture. The liability is later reduced when the payment is made within the specified credit period.