Accounts payable definition

The term accounts payable (AP) relates to goods or services that are received in advance of payment. This means the company that received the goods didn’t pay for them in cash up front, and therefore acquired them ‘on credit’, meaning they will need to pay the supplier back after a short period of time.

As the company that received the goods hasn’t yet paid for them, the transaction comes under accounts payable and is treated as a liability until it is paid off. The company that supplied the goods did so ‘on credit’, and is therefore known as the creditor.

Accounts payable liabilities are typically short-term debts that need to be repaid within a certain amount of time in order to avoid defaulting. You can essentially think of them as IOUs – the company that received the goods on credit is afforded a period of time before they have to pay for them.

The money that a company owes to its suppliers will typically be shown as a liability on its balance sheet.

Each company involved in the transaction will need to record what has taken place. As an example, Company X, which received the goods, will record it as accounts payable. On the other hand, Company Y, which supplied the goods and is therefore awaiting payment for them, will record it as accounts receivable.

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Posted by Clear Books