Accounts payable (AP) are amounts due to vendors or suppliers for goods or services received that have not yet been paid for. The sum of all outstanding amounts owed to vendors is shown as the accounts payable balance on the company’s balance sheet.
A company’s payable (AP) ledger lists its short-term liabilities — obligations for items purchased from suppliers, for example, and money owed to creditors.
What Is Accounts Payable (AP)?
A company’s accounts payables comprise amounts it owes to suppliers and other creditors — items or services purchased and invoiced for. AP does not include, for example, payroll or long-term debt like a mortgage — though it does include payments to long-term debt.
Payables are typically recorded upon receipt of an invoice based on the payment terms both parties agreed to when initiating the transaction. When a finance team receives a valid bill for goods and services, it is recorded as a journal entry and posted to the general ledger as an expense. The balance sheet shows the total amount of accounts payable, but it does not list individual transactions.
Once an authorized approver sign off on the expense and payment is issued per the terms of the contract, such as net-30 or net-60 days, the accounting team records the expense as paid.
Accounting for Payable
The normal accounting for accounts payable is to debit either the expense or asset account associated with a purchase and credit the accounts payable account (which is a liability account).
When the liability is paid, the entry is a debit to the accounts payable account (thereby eliminating the liability) and a credit to the cash account (reducing the balance in that account). This accounting is used in a double-entry bookkeeping system.
When individual account payable is recorded, this may be done in a payables subledger, thereby keeping a large number of individual transactions from cluttering up the general ledger.
Alternatively, if there are few payables, they may be recorded directly in the general ledger. Payable appears within the current liability section of an entity’s balance sheet.
The Accounts Payable Process
The accounts payable process steps include maintaining the master vendor file, receiving vendor invoices, coding or uploading invoices into a financial or accounts payable automation system, verifying and matching invoices, routing for approval, and processing payments.
The AP process also includes responding to vendor inquiries, negotiating terms, and ensuring vendors are paid on time. Other accounts payable processes include maintaining internal controls from identifying duplicate or fraudulent invoices, preventing duplicate payments, and accounts payable audits.
Examples of accounts payable
There are hundreds of different types of payables that a business may have on its balance sheet under current liabilities. Often, these are short-term financial obligations that the company will pay quickly in order to balance its books.
Here are a handful of account payable examples to give you an idea of why a business may owe money to partners and vendors:
- Raw materials/fuel – When a manufacturing company invests in raw materials, the items are bought on credit because they haven’t yet earned the cash needed to purchase production materials outright. This is AP, and will normally have a credit period of 30 days or more.
- Transportation and logistics – When a company needs to transport raw materials or goods which it has produced, it’s common practice to rely on transportation providers as part of an accounts payable credit agreement, with businesses paying for the cost of logistics later down the line.
- Equipment – The leasing of equipment is commonly paid for by accounts payable. When a business requires a piece of equipment on an ad hoc basis, they’re provided with it on the condition that they pay within a set period.
Frequently Asked Questions
What is accounts payable full cycle?
The term full-cycle AP refers to the process required to complete a purchase on a historic order which was listed as, AP. Also known as a ‘Procure to Pay’ or ‘P2P’, the process involves the accounting and procurement arm of a business carrying out the necessary administrative work required to complete a purchase – including approving invoices, issuing checks, recording payments, and matching documents.
What is the Difference Between AP and Trade Payables?
AP and trade payables often get used interchangeably, but the two terms have slightly different meanings. Trade payables refer to the money owed to vendors for inventory, such as business materials, supplies, etc. Accounts payable refers to the accrued payments or obligations that a business owes, such as electricity, labor, leasing, etc.
Is Accounts Payable a Liability or an Expense?
AP is a liability since it is money owed to one or many creditors. Accounts payable is shown on a business’s balance sheet, while expenses are shown on an income statement.
Is Payable a Debit or Credit Entry?
Since AP is a liability, it should have credit entry. This credit balance then indicates the money owed to a supplier. When a company pays its supplier, the company needs to debit accounts payable so that the credit balance can be decreased.
How is Payable Recorded on a Balance Sheet?
AP is listed on a business’s balance sheet, and since it is a liability, the money owed to creditors is listed under “current liabilities”. Typically, current liabilities are short-term liabilities and less than 90 days.