Loading the player...

What is 'Accounts Payable - AP'

Accounts payable (AP) is an accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. On many balance sheets, the accounts payable entry appears under the heading current liabilities. Another common usage of AP refers to a business department or division that is responsible for making payments owed by the company to suppliers and other creditors.

BREAKING DOWN 'Accounts Payable - AP'

Accounts payable are debits that must be paid off within a given period to avoid default. For example, at the corporate level, AP refers to short-term debt payments to suppliers. The payable is essentially a short-term IOU from the business to the other business, who acts as a creditor.

How to Record Accounts Payable

To record accounts payable, accountants or bookkeepers credit accounts payable when they owe a bill, and they debit accounts payable when they pay the bill. For example, imagine a business incurs a $500 invoice for office supplies. When the AP department receives the invoice or incurs the bill, it records it as a debit in an accounts payable field. As a result, if anyone looks at the total debit in the accounts payable category, he can instantly see what the business owes all of its vendors and short-term lenders. When the bill is paid, the department enters a credit in its accounts payable column.

To balance these entries, the accountant must enter a debit in the relevant category, office supplies in this case, when the debt is incurred, and he must enter a credit in the cash column when he pays the invoice.

Accounts Payable and Long-Term Debts

Accounts payable are a type of short-term debt. Other short-term business debts include expenses such as payroll costs, business income taxes and short-term loans. In contrast, long-term debts include lease payments, retirement benefits, individual notes payable and a range of other debts repaid over a long term.

Accounts Payable vs. Trade Payables

While some people use the phrases accounts payable and trade payables interchangeably, the phrases refer to similar but slightly different things. Trade payables constitute all the money a company owes the vendors it buys business supplies and materials included in its inventory, while accounts payable include all other short-term debts. For example, if a restaurant owes money to a food or beverage company, the stock is part of its inventory and thus part of its trade payables, while money owed to the company that launders its chef's whites falls into the accounts payable category. Some accounting methods roll both of these categories into the accounts payable category.

Accounts Payable vs. Accounts Receivables

Accounts receivables and accounts payable are essentially opposites. Accounts payable is the money a company owes its vendors, while accounts receivables is the money that is owed to a company. If a company has a bill in its accounts payable department, the company it owes the funds to categorizes the bill in its accounts receivables department.

RELATED TERMS
  1. Accounts Payable Turnover Ratio

    A short-term liquidity measure used to quantify the rate at which ...
  2. After-Tax Payable Period

    The average period that a company has between receiving goods ...
  3. Accounts Payable Subsidiary Ledger

    An accounting ledger that shows the transaction history and amounts ...
  4. Bills Payable

    Similar to accounts payable, this term is used to describe a ...
  5. Current Liabilities

    A company's debts or obligations that are due within one year. ...
  6. Due To Account

    A liability account typically found inside the general ledger ...
Related Articles
  1. Investing

    Calculating the Accounts Payable Turnover Ratio

    The accounts payable turnover ratio measures the speed at which a company pays its suppliers.
  2. Investing

    Accounts Payable

    Accounts payable is the amount of a company's total invoices currently waiting to be paid. These invoices are from vendors for products and services that were recently delivered.
  3. Investing

    Days Payable Outstanding

    Days Payable Outstanding, or DPO, is an accounting measurement that tells the average number of days it takes a company to pay its suppliers and vendors. Days Payable Outstanding is widely used ...
  4. Investing

    What does Accrual Mean?

    In accrual-based accounting, transactions are recorded on the books as they occur, even if payment has not yet been received or made. Accruals represent liabilities and non-cash-based assets. ...
  5. Investing

    Dynamic Current Ratio: What It Is And How To Use It

    Learn why this ratio may be a good alternative to the current, cash and quick ratios.
  6. Investing

    Current Liabilities

    Current Liabilities are company debts due within one year or one operating cycle, whichever is greater. An operating cycle is the time it takes a company to purchase inventory and convert it ...
  7. Investing

    What Does Debit Mean?

    Debit is an accounting term used to refer to the left side of an accounting journal entry. Each debit must be offset by an equal credit entry.
  8. Investing

    Debt Ratio

    The debt ratio divides a company’s total debt by its total assets to tell us how highly leveraged a company is—in other words, how much of its assets are financed by debt. The debt component ...
  9. Small Business

    What's a Liability?

    A liability is a debt. It is an obligation that arises during the course of business and represents a third-party claim on the company's assets. A liability can arise in a number of different ...
  10. Investing

    Company Survival: Cash Conversion Cycle Is Key

    Find out how to use this figure to analyze a firm's financial condition.
RELATED FAQS
  1. Are accounts payable a liability?

    Take an in-depth look at accounts payable, or trade payable, an important current liability account listed on a company's ... Read Answer >>
  2. Are accounts payable an asset?

    Find out why the general ledger accounts payable is considered to be a current liability, not a current asset, and how it ... Read Answer >>
  3. Are accounts payable counted as revenue?

    See how accounts payable is treated on the balance sheet, and why it is considered an expense and liability rather than revenue ... Read Answer >>
  4. How are accounts payable listed on a company's balance sheet?

    Find out how accounts payable is listed on a company's balance sheet, why it is considered a current liability, and how it ... Read Answer >>
  5. Are accounts payable an expense?

    Learn about how to differentiate between liability accounts and expense accounts, and see why accounts payable is considered ... Read Answer >>
  6. What is the difference between accrual accounting and accounts payable?

    Understand the difference between accrual accounting, an accounting method, and accounts payable, which is a ledger entry ... Read Answer >>
Hot Definitions
  1. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  4. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  5. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  6. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
Trading Center