What is accounts payable?

Definition

Accounts payable is a current liability for bills you have received but not yet paid. It is the money you owe vendors for goods or services that already showed up.

Think of it as the unpaid stack of vendor invoices. The flour is in the kitchen, the invoice is on your desk, and the cash has not left the bank yet.

Where it shows up

Balance Sheet: Located in the current liabilities section.

P&L: Related to the expense or inventory that was recorded when the bill was entered, not when it was paid.

Cash flow: Related to the later payment that clears the payable.

See also: Vendor Bill · Accounts Payable Aging · Current Liabilities · Days Payable Outstanding

When you look at your balance sheet, accounts payable sits in current liabilities, near credit cards and payroll taxes payable. When accounts payable is high, it usually means you bought more on credit or you are taking longer to pay; when it is low it usually means you paid down old bills.

The profit and loss statement does not show AP as a line, because the related cost already hit the P&L when the bill was recorded. Paying the bill later does not create a second expense.

On the cash flow statement, the payment is the event that matters. Cash goes down when you pay the vendor, and the AP balance goes down with it.

Many AP aging reports list the same bills by how late they are: current, 30 days, 60 days, and 90 days past due.

How it works

A typical path starts with a purchase. You order from a vendor, or a delivery arrives at the door.

You may have a purchase order, a packing slip, and then an invoice. Some shops check that all three agree on quantity and price before they approve the bill, a three-way match of the order, the receipt, and the invoice.

Once the bill is approved, it is entered against that vendor in your books. The vendor list is simply the roster of who you buy from and how you pay them.

Duplicate names or old addresses on that list make it easy to pay the wrong person or enter the same bill twice.

When it is time to pay, you send a check, an ACH, or a card payment. The AP balance for that invoice drops to zero.

Unpaid invoices stay on the aging report until they are paid or written off.

Example

A neighborhood bakery orders $1,000 of flour and sugar from a mill. The mill delivers on Monday and emails an invoice due in 30 days.

The bakery records:

Debit: Inventory $1,000

Credit: Accounts payable $1,000

Inventory (an asset) and accounts payable (a liability) both go up by $1,000. Cash has not moved.

The balance sheet is larger on both sides. The profit and loss statement has not changed yet, because the flour is still on the shelf.

Thirty days later the bakery pays the mill:

Debit: Accounts payable $1,000

Credit: Cash $1,000

AP for that bill falls back to zero, and cash falls by $1,000. The inventory stays until the bakers use it, at which point inventory is reduced and cost of goods sold is recorded.

Common mix-ups

Accounts payable is not the same thing as expenses. Buying flour on credit raises AP and inventory.

The expense shows up later, when the flour is baked into bread. Paying the mill only settles the liability; it does not create the expense.

An accrual is an estimate you record because you know you owe something but the invoice has not arrived. The invoice is the vendor's actual bill.

When the real invoice comes in, you reverse the accrual and record the AP. If you leave both sitting there, you have counted the same owe twice.

The AP total on the balance sheet should match the unpaid bills in your files. A desk drawer of invoices that never got entered is still money you owe, even if it is not on the books yet.

The opposite mistake is AP that stays on the books after you already paid. That makes you look more in debt than you are.

Related terms

• Vendor Bill: The invoice a supplier sends that becomes a payable.
• Accounts Payable Aging: A report bucketing unpaid vendor bills by how long they have been outstanding.
• Three-Way Match: Checking the purchase order, receipt, and vendor bill against each other before paying.
• Days Payable Outstanding: The average number of days the business takes to pay its vendors.
• Check Run: The scheduled batch in which approved vendor bills are paid.
• Current Liabilities: Obligations due within the next twelve months.
• Accounts Payable Turnover: How many times payables are paid off and rebuilt in a period.
• Vendor Master File: The maintained record of each supplier's details, terms, and payment information.
• Purchase Order: The document authorizing a purchase from a vendor at agreed terms.