What Is Accounts Payable (AP)?
Accounts payable (AP) is an accounting entry that represents a company's obligation to pay off a short-term debt to its creditors or suppliers. It appears on the balance sheet under the 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.
Understanding 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 another business or entity.
How to Record Accounts Payable
To record accounts payable, the accountant or bookkeeper credits the accounts payable account when she gets the bill or invoice. Then, when she pays the bill, she debits accounts payable.
For example, imagine a business gets a $500 invoice for office supplies. When the AP department receives the invoice, it records a $500 debit in the accounts payable field and a $500 credit to office supply expense. As a result, if anyone looks at the balance in the accounts payable category, they will see the total amount the business owes all of its vendors and short-term lenders. The company then writes a check to pay the bill, so the accountant enters a $500 debit to the checking account and enters a credit for $500 in the accounts payable column.
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 longer term.
Accounts Payable vs. Trade Payables
Although some people use the phrases "accounts payable" and "trade payables" interchangeably, the phrases refer to similar but slightly different things. Trade payables constitute the money a company owes the vendors for inventory-related goods, such as business supplies or materials that are part of the inventory. Accounts payable include all the short-term debts or obligations.
For example, if a restaurant owes money to a food or beverage company, those items are part of the inventory, and thus part of its trade payables. Meanwhile, obligations to other companies, such as the company that cleans the restaurant staff uniforms, falls into the accounts payable category. Some accounting methods roll both of these categories into the accounts payable category.
Accounts Payable vs. Accounts Receivable
Accounts receivable and accounts payable are essentially opposites. Accounts payable is the money a company owes its vendors, while accounts receivable 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 that same bill under accounts receivable.