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 account 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.

Recording accounts payable

Accounts payable are recorded as liabilities on the balance sheet. When a company receives goods or services from a supplier on credit, an accounts payable entry is made to recognise the obligation to pay. This entry increases accounts payable (a current liability) and also increases the corresponding expense or asset account, depending on the nature of the transaction.

Accounts payable are typically settled within a specified period, after which the liability is reduced by making a payment to the supplier. Keeping accurate records of accounts payable is essential for managing cash flow and ensuring timely payments.

Accounts payable vs. trade payables

Accounts payable and trade payables are terms often used synonymously in accounting, referring to amounts owed by a company to its suppliers for goods or services received on credit. Both represent obligations to pay in the near future, typically within one year.

Accounts payable generally include all short-term obligations to suppliers, including invoices, bills, and other payables related to trade transactions. Trade payables specifically emphasise obligations arising directly from purchasing goods or services for resale or operational use.

Accounts payable vs. accounts receivable

Accounts payable and accounts receivable are both vital components of a company’s financial operations, yet they represent distinct aspects of its financial transactions.

Accounts payable refers to the money a company owes to its suppliers and creditors for goods and services purchased on credit. It represents a liability that needs to be settled within a specific period, typically within one year. In contrast, accounts receivable denotes the money owed to a company by its customers for goods or services sold on credit. Accounts receivable is an asset on the balance sheet, indicating revenue yet to be received by the company.

Example of accounts payable

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

   The accounting entry for this transaction is:

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

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

   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:

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

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

   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.