The amount a company owes to vendors or suppliers in the short-term for goods or services the company received on credit.
What Is An Account Payable
An account payable (AP) is a balance shown on a company's balance sheet that shows the total short-term debt a company owes to vendors, suppliers, or employees as reimbursements. This amount is listed under the current liabilities section of a balance sheet. You will record an amount after a supplier submits an invoice. The sum of all these invoices is your total debt to vendors. Since an account payable is considered a liability, it is not a business expense found on an income statement.
Sometimes, to improve cash flow, management will decide to pay bills to vendors or suppliers closer to the due date even though they have received the products or services. So an account payable is similar to a short-term IOU or written acknowledgment of a debt. A company can have multiple payments due to suppliers, and all these outstanding payments are recorded on the balance sheet as accounts payable.
Example Of An Account Payable
A business will have an expense account under different categories, a cash account, and an account payable line item in a balance sheet. For example, a company can have an expense account for office supplies, an expense account for cleaning costs, and a total cash account of $9,000.
Suppose the company allocates $1,000 for office supplies and $300 for cleaning costs. If the company orders $600 in office supplies and receives an invoice for $100 in cleaning costs, its office supply expense account will reduce to $400, and the cleaning expense account will be $200. The account payable sum will be the total cost of the supplies and cleaning making it $700.
Once the company pays for the bill for the office supplies, the accounts payable will be debited by $600, making it only $100. The accountant will also credit the cash account at $600, reducing the total cash to $8,400. Now the office supplies cost is no longer a current liability or debt to be paid.
History Of An Account Payable
An account payable was made possible through invoicing's technological developments that allowed suppliers to see and track a history of invoices sent to their customers. Invoices are crucial for determining what a company owes another company and when it is due after goods or services have been provided. Manual invoices started in the mid-1960s.
It wasn't until the 1990s that companies developed web-based applications for invoicing practices. Electronic invoicing services can automate a company's accounts payable department and save a company time and operational costs compared to manual processing. As of 2013, European companies are encouraged to adopt electronic invoicing practices, and the United States Treasury is considering e-invoicing for the federal government.
Accounts Payable vs. Accounts Receivable
Accounts receivable is the opposite of account payable. Instead of money that your company owes to a supplier or vendor, the accounts receivable is money owed to you. The cash on accounts receivable is an asset and usually money owed to your company by customers, especially through credit transactions.
Therefore, one company's accounts payable will be recorded as another company's account receivable for the same transaction. The company waiting to receive money will record the amount on their balance sheet as an account receivable. The accounts receivable will be under the current assets section as opposed to the current liabilities section.
Accounts Payable vs. Notes Payable Liabilities
Although a company will list both as liabilities on their balance sheet, you do not want to confuse an account payable and a notes payable liability. A notes payable liability is also known as a promissory note. It is a debt created by a legal document such as through obtaining a bank loan, purchasing a building, or purchasing a car.
Unlike an account payable, which is a current short-term liability only, notes payable liability can be either long-term or short-term, depending on the agreed-upon due date. If it is due within one year, the liability is short-term, and if it is more than a year, long-term. The sum of cash owed can be due at a fixed future time or on-demand under specific terms.
Accounts Payable vs. Trade Payables
You may hear companies use the terms accounts payable and trade payables interchangeably. However, there is a slight difference. Trade payables specifically refer to money that a company owes for physical goods that are inventory-related. For example, produce and drinks are considered inventory for a restaurant, so if you are a restaurant and owe money to a food or beverage company, the amount owed will be a trade payable. Accounts payable can refer to all other short-term debts, including advertising, travel, entertainment, office supplies, and utilities.
Trade payables can be considered a line-item under the broader accounts payable category. Some companies will combine their trade payables with other outstanding debts and call them all accounts payable.