Accounts Payable - AP

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.