Accounts Payable Definition

Accounts Payable Definition

The business definition of accounts payable is an accounting term. It describes the money a business owes its vendors and suppliers for goods and services the company purchased on credit. Within a company, the department that handles payments to vendors also may be called accounts payable.  

The opposite of accounts payable is accounts receivable. Accounts receivable refers to money owed to the business by customers or other legal entities. 

How are accounts payable recorded?

A vendor or supplier will send an invoice reflecting the amount due for the goods or services. This amount is added to accounts payable. Usually, the vendor specifies when payment of the invoice is due. This time frame typically is within a short period of time like 30 or 60 days. 

Accounts payable list each short-term liability and are reflected as current liabilities on the company’s balance sheet. Any increases or decreases in the total accounts payable for the accounting period appear on the cash flow statement.  

Why It’s Important to Maintain Accurate Accounts Payable Records

Keeping up-to-date and complete records of accounts payable benefits your business because these records provide the accurate financial information you need for short- and long-term planning. The company’s current liabilities also provide a window into the company’s health. This can be important information for investors. 

Whether accounts payable are paid on time or late also impacts the business’s relationship with suppliers. A small business owner who fails to stay on top of accounts payable risks losing vendors vital to the business. 

Accounts Payable Examples

Depending on the industry and size of the company, an accounts payable department may handle many things. Examples include:

• Travel expenses
• Bulk office supply orders
• Regular sanitation and cleaning services
• Staff uniforms  
• A restaurant’s food inventory

The accounts payable department would also manage petty cash kept on hand to pay small, irregular business expenses.

Realistically, a larger limited liability company or corporation that employs an entire department to manage accounts payable has advantages over small businesses. It can implement systems and train staff to prevent the company from paying inaccurate or fraudulent invoices. These resources also help track due dates to avoid late payments. 

Summary

When a company buys goods and services on credit, accounts payable is the money a business owes its vendors and suppliers for those items. It also refers to the business department that handles these payment transactions. 

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