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Accounts payable

Accounts Payable (AP) refers to the amount of money a company owes to its suppliers or creditors for goods or services that have been received but not yet paid for. This appears on the company's balance sheet as a short-term debt. Accounts payable are managed by the department responsible for making payments owed by the company to its suppliers.

Main Points:

  • AP can refer to both the outstanding debts and the department responsible for managing the payments.
  • Payables can be created from purchases on credit or subscription/ instalment payments.
  • AP is compared with accounts receivable, which is the amount of money owed to the company by its customers.
  • Accounts payable are considered as a current liability because they represent funds owed to others.

For Example, Suppose that a company called ABC Inc. purchases $10,000 worth of office supplies from a supplier called XYZ Inc. ABC Inc. agrees to pay the amount within 30 days, so the supplier extends credit to ABC Inc. for the purchase. 

In this case, ABC Inc. would record the purchase on its balance sheet as an accounts payable liability of $10,000, with XYZ Inc. as the creditor.

Once the 30-day period has passed and ABC Inc. has paid the $10,000 to XYZ Inc., the accounts payable liability would be removed from the balance sheet and replaced with a cash payment. 

The transaction would also be recorded in the company's general ledger as a debit to the accounts payable account and a credit to the cash account.

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