Accounts Payable (A/P)

A/P- in international trade documentation, abbreviation for “authority to purchase” or “authority to pay.” In accounting, abbreviation for “account payable.”

Definition of Accounts Payable

Accounts A company's payables are the funds owed to its suppliers or vendors for goods or services purchased on credit. In other words, a liability account indicates the amount of money owed to suppliers by a firm and is expected to pay within a short time, often 30 to 60 days.

Understanding the Term Accounts Payable

The accounts payable process begins when a business orders goods or services from a vendor. The vendor then submits an invoice to the company for payment, and the amount owed is recorded in the company's accounts payable ledger. When the invoice is due, the company will pay the vendor.

Accounts payable is essential to a company's financial management because it influences cash flow, credit ratings, and supplier reputation. Late payments can result in penalties, higher interest rates, and a reduction in future credit availability. On the other hand, prompt payment of accounts payable can help you retain a good reputation with your suppliers and may result in better payment terms and discounts.

Accounts Payable Turnover and its Impact on Business

The Accounts Payable Turnover ratio evaluates how quickly a company pays its debts and is derived by dividing the supplier credit purchase by the average accounts payable balance. A high accounts payable turnover ratio shows that a company pays its bills fast, whereas a low percentage suggests that the company takes a long time to pay its debts.

A high accounts payable turnover ratio implies that a corporation pays its debts promptly, releasing funds for other uses. On the other hand, a low accounts payable turnover ratio may suggest that the company needs to take more time to pay its bills, tying up funds that may be utilized for other purposes. 

This information can be important for internal management and external parties interested in the company's financial health and capacity to meet its obligations, such as investors and lenders.

Accounts Payable Example

The accounts payable procedure starts when a business puts in an order and receives an invoice from a vendor, which is then entered in the business's accounts payable ledger. When the invoice is due, the company pays the vendor. Accounts payable is a vital component of a company's financial management because it influences cash flow, credit ratings, and supplier reputation.

In Sentences

• Accounts payable is the amount owing to vendors for products and services acquired on credit.
• A high accounts payable turnover percentage implies that a corporation pays its bills on time.