What is accounts payable?

In bookkeeping and accounting, “accounts payable” (often abbreviated as AP) refers to the amount of money that a business or organization owes to its suppliers or vendors for goods or services that have been received but not yet paid for. Accounts payable is a liability on the balance sheet because it represents a debt that the business is obligated to settle in the future.

Here’s how accounts payable works:

1. Purchase of Goods or Services: When a business purchases goods or services on credit from a supplier or vendor, an accounts payable entry is created. This entry records the amount owed and the terms of payment, including the due date.
2. Recording the Transaction: The bookkeeper or accountant records the accounts payable transaction in the general ledger, typically as a credit to the accounts payable account and a debit to the appropriate expense or asset account. This reflects the increase in the liability (accounts payable) and the corresponding reduction in assets or increase in expenses.
3. Payment Process: When the due date arrives, the business makes the payment to the supplier or vendor. The accounts payable account is then decreased by the amount paid, and the corresponding cash or bank account is decreased by the same amount. This process reflects the settlement of the debt.

Accounts payable is a critical part of a company’s financial management, as it represents an obligation that must be managed effectively to ensure the business maintains good relationships with its suppliers and avoids late payment penalties or disruptions in the supply chain. Managing accounts payable involves monitoring due dates, negotiating favorable payment terms, and ensuring that invoices are accurate and match the goods or services received.

In addition to its role in financial reporting, accounts payable is an important consideration for working capital management and cash flow forecasting. Businesses need to strike a balance between paying their obligations promptly and optimizing cash flow to meet other operational needs and investment opportunities.

A proficient bookkeeper for small business can use QuickBooks to maintain accurate financial records, track expenses, and ensure compliance with tax regulations.