An accounts payable (AP) entry indicates a company's obligation to pay off debts to its suppliers or creditors within a given period in order to avoid default. Payables are essentially short-term IOUs from your business to another business or entity. When recorded, the accounts payable account is credited when the bill or invoices is received, and when it is paid, accounts payable is debited.
Why are Accounts Payable Important?
Accounts payable entries appear under current liabilities on a balance sheet where anyone looking at the balance can see the total amount the business owes its vendors and short-term lenders.
There are distinctions with the types of debt a company has. Accounts payable are a type of short-term debt along with expenses such as business income taxes, short-term loans, and payroll costs. Long-term debts, on the other hand, include things like retirement benefits, lease payments, and other debts that are repaid over a longer timeframe.
The term “trade payables” is often used interchangeably with accounts payable, but there are slight differences between the two.
- Accounts payable include all short-term debts and/or obligations.
- Trade payables represent the monies a company owes vendors for inventory-related goods.
Some accounting methods roll both of these types into the accounts payable category.
Accounts payable is essentially the opposite of accounts receivable. It is the money a business owes its suppliers while accounts receivable is the money others owe the company. So, if one company lists a bill as an accounts payable, the other company categorizes that same bill under accounts receivable.