What's Account Payable ?

Account payable (AP) is the money your company owe to your vendors or suppliers.

Accounts payable are short term debts that must be paid off within a given period.

Accounts payable are found on a company balance sheet, and recorded as current liability.

Why is Account Payable (AP) Important?

What does it mean if account payable increases over a period of time?

It means that the company is buying more goods or services on credit term rather paying cash. If the Account Payable is not dealt with after a certain period of time, the company might have difficulty in cash flow as it is unable to pay its vendors or suppliers.

What about a decrease in Account Payable?

If a company's Account Payable decreases, it means the company is paying its debts at a faster rate than it is purchasing new goods or services on credit term.

Recording Accounts Payable

To record accounts payable, one must credits account payable when they received a bill or invoice. To offset for this entry, one generally debit an expense account for the good or service that was purchased on credit. It can also be debit into an asset account if the item purchased was an asset. When the bill is paid, one must debits accounts payable to decrease the liability balance and credit either a cash account or bank account, which also decreases the cash or bank balance.

For example, a business gets a $1,000 invoice for printing & stationery. When one receives the invoice, he or she records a $1,000 credit in accounts payable and a $1,000 debit to printing & stationery. Now this $1.000 will appear at income statement under expenses, so the company has recorded the purchase transaction even though cash has not been paid out. This is in line with accrual accounting where expenses are recognized when incurred rather than when cash changes hands.

When one pay the bill during the credit period, one will debit the account payable $1,000 and credit $1,000 in either cash account or bank account. This will decrease the amount in account payable and also decrease the amount in cash or bank account.

Account payable is created any time when a company purchase a service or products on credit term. It is important for a company or business to monitor their Account Payable monthly as it will affect a company or business cash flow.