Accounts Payable

The money a business owes to its suppliers or creditors for goods and services received but not yet paid for. It represents a liability on a company’s balance sheet and is a key component of working capital management.

Here’s how accounts payable works:

Purchasing Goods or Services: When a business buys goods or services from a supplier, it receives an invoice detailing the amount due and the payment terms.
Recording the Invoice: The business records the invoice in its accounting system as an accounts payable entry. The amount owed is credited to the accounts payable ledger, and the corresponding expense is debited (e.g., inventory or expense account).
Payment: Once the business is ready to pay the supplier, the payment is processed. This reduces the balance in accounts payable and eliminates the liability.
Payment Terms: AP often has payment terms, such as “Net 30” or “Net 60,” meaning the business has 30 or 60 days to pay the invoice. Early payments may come with discounts.

Effective accounts payable management ensures that a business pays its suppliers on time, maintains good relationships, and takes advantage of any available early payment discounts.