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Accounts Payable

A payable account represents a responsibility held by a business to settle dues to a third party for goods and/or services obtained on credit. These accounts are documented as liabilities on a company's balance sheet.

What are accounts payable?

In a business, accounts payable represents the amounts owed to suppliers for goods and services purchased on credit. The accounts payable account is a liability on the balance sheet, indicating a future payment the company needs to make.

How do you calculate accounts payable?

The calculation of accounts payable (AP) is a relatively simple process. Initially, the total amount owed to suppliers for goods and services throughout the fiscal year is determined by reviewing past invoices and summing the costs. Once the owed amount is known, the AP figure is calculated by subtracting the company's available cash from the total owed to suppliers, indicating the company's current liabilities for accounts payable.

Why is it important to know your accounts payable?

Accounts payable is a critical aspect of financial modeling as it reflects a company's short-term liquidity, indicating its ability to pay short-term bills. This aspect is vital for a company's borrowing capacity, as lenders commonly focus on short-term liquidity.

What's the difference between accounts payable and accounts receivable?

An account payable (AP) is a company's liability representing the unpaid balance owed to its suppliers, while an account receivable (AR) is the company's asset representing the total amount owed by its customers. The key distinction is that AP is a current liability due within a year, whereas AR is a long-term asset due in more than one year.

What is an example of accounts payable?

An example of accounts payable involves a company receiving a $1,000 bill from a supplier. The company records a liability of $1,000 in its accounts payable ledger, noting the bill in its accounting records, and subsequently makes payments to settle the bill with the supplier.