Accounts Payable

What are Accounts Payable? 

In supply chain finance, accounts payable is the umbrella term for all the accounts that fall under the category of obligations for an organization. In simple terms, accounts payable or AP are those accounts that a company has to pay back. 

AP comprises, amongst others, the following accounts:

  • Any sum that is outstanding towards creditors, including suppliers and vendors
  • Any outstanding bills payable by an organization

Accounts payable usually comprises the short-term payment obligations of an organization and are shown under the head ‘Current Liabilities’ on the balance sheet. Any rise in an organization’s Accounts payable signifies an increase in its outstanding debt, whether it is by way of buying a higher amount of goods or services or credit or taking a short-term loan from another organization. 

For an individual, accounts payable may include all the bills payable by them in the short run, for instance, telephone bills, electricity bills, etc. The aforementioned category may also comprise short-term obligations such as the repayment of a loan. 

Evolution of the Concept of Accounts Payable 

The treatment of accounts payable has evolved over the years. A few decades ago, such accounts were recorded on paper, and all the supporting invoices were also stored in their tangible form. With the automation of book-keeping, accounts payable are now recorded digitally. Although organizations retain the physical copies of invoices, their digital copies are also stored in their AP systems. 

The accounting for accounts payable is done on an accrual basis. Since AP is a liability account, it is credited whenever a payable is generated, for instance, an invoice for the purchase of goods on credit. The corresponding debit entry is in the name of the expense account for said goods.

Examples of Accounts Payable 

Some common examples of Accounts Payable are as follows:

  • Purchase of any goods or services on credit 
  • Payments due for leasing
  • Payments due for transportation
  • Payments due for the licensing of a profit or service 

What Are the Causes of the Generation of Accounts Payable? 

Accounts payable gets generated every time an organization procures any goods or services without paying for the same on an immediate basis. Furthermore, any other short-term liabilities are also categorized under the head of accounts payable. 

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