Accounts Payable is the phrase used when a company buys something on credit and has to pay it back quickly. It is a short-term debt that falls under the umbrella of Current Liabilities and must be repaid in order to prevent deficiency.
Accounts Payable (AP) is created when a business purchases products or services on credit from its vendors. AP should be paid off within the timeframe agreed upon or the course of the operations concerned as per mutual agreement.
For example, if company X purchases products on credit from company Y with a contract that it must be paid back within 30 days. Even if no money has been exchanged yet, it will be considered a sale in accounting terms. This is company X's Accounts Payable, and this sale is company Y's Accounts Receivable.
A sharp decline in AP indicates that the company is paying off its previous debts quicker than it is bringing in new ones. AP management is essential for controlling a company's financial flow.
Use of this Term in Sentences
- Accounts Payable is a word that is not confined to businesses only, but individuals have them too.
- If accounts payable climb over the preceding period, it indicates that the business is purchasing more products or services on credit than it can pay for in the agreed timeframe.