Accounts Payable

Definition, examples, why AP is important

Table of Contents

What is AP aka Accounts Payable?

What are some examples of Accounts Payable?

What is Accounts Payable Important?

What is AP (Accounts Payable)?

Accounts payable is a current liability on the balance sheet that represents money due to vendors or suppliers that have not yet been paid for. Accounts payable are created when a company receives goods or services on credit and is contractually and legally obligated to repay the debts within one year.

It's common practice in many industries, especially those where the average purchase price is in the thousands or millions of dollars, to make sales on credit. This means that companies will enter contracts to buy goods and services and will pay for them (typically as invoices) over the course of the contract, as opposed to at the time of sale. The total amount a company owes to all the vendors and suppliers, which it will be invoiced for and pay over the course of the next 12 months, is known as Accounts Payable.

What are some examples of Accounts Payable?

Accounts payable is a very common current liability on the balance sheet across industries. Here are a few examples:

  1. Consulting Services: a business may enter into a year contract with a consultant for which they'll receive constant service throughout the year, but pay on a quarterly basis. The client business would record the amount owed to the consultant as Accounts Payable and then reduce it each quarter as they pay the invoices submitted by the consultant.
  2. SaaS: a SaaS company may need to use another software vendors' technology in order to deliver their product. Because they'll need to buy the licenses for the foreseeable future, they may decide to negotiate a long term contract where they can use all of the licenses they want and will pay for the total licenses used at the end of the year. The amount of money they are obligated to pay at the end of the year will increase with each license added, and the total dollar amount due is recorded in accounts payable.
  3. eCommerce Apparel: a eCommerce store may contract with a clothing manufacturer to produce large orders of t-shirts on a quarterly. However, the eCommerce store may have most of its cash tied up in their current inventory they have no yet sold, so the manufacturer could provide them with the full order of next quarter's t-shirts, which the store will pay for in the near future. The money owed to the manufacturer is recorded as accounts payable on the eCommerce store's balance sheet.

Why is Accounts Payable Important?

The most important reason for Accounts Payable to record how much money is owed by a business to its vendors and suppliers. As with any types of debt, its important to understand how much money is owed in comparison to how much money is available, or expected to be available (i.e. through future sales) so that a company is able to meet its obligations. Many Fortune 500 companies with massive supplier networks have entire Accounts Payable departments within their finance organizations to ensure that their debts are managed and paid in a timely manner.

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