What is accounts payable (AP)?

Accounts payable (AP) meaning

Accounts payable are a business’s outstanding debts or liabilities owed to suppliers or vendors for goods/services that have been received but not paid for yet. The amount of AP is recorded in a balance sheet as a current liability. AP is typically settled within a short period of time, such as within 30 to 60 days.

Managing accounts payable is an essential part of business accounting, as it ensures that creditors are paid on time and helps maintain good relationships with suppliers. By keeping track of accounts payable, businesses can effectively manage their cash flow, track expenses, and accurately report their financial status.

How to record accounts payable

Recording accounts payable allows businesses to accurately track their financial obligations to vendors and suppliers. It involves a two-step process using the double-entry bookkeeping system.

Step 1: When you receive a bill or invoice

When you receive a bill or invoice from a supplier for goods or services purchased on credit, you need to credit the accounts payable account. The offsetting debit will depend on what you purchased on credit. For example, office supplies that are consumed within the current accounting period would debit the expense account. On the other hand, long-term assets like equipment and machinery would credit the asset account.

For example, an invoice for $1,000 worth of office supplies would result in the following entry:

• Debit: Office supplies expense +$1,000
• Credit: Accounts payable +$1,000
  
  

Step 2: When you pay the bill or invoice

After paying the supplier or vendor, another journal entry is needed to record it. Debit the accounts payable account for the amount paid, then credit the cash account for the same amount. This reflects the decrease in liability and cash used for the payment.

Following the same example, the journal entry would be:

• Debit: Accounts payable -$1,000
• Credit: Cash -$1,000

In conclusion, accounts payable are a crucial aspect of a company’s financial operations, and maintaining accurate records of these liabilities is essential for effective financial management and reporting.