Accounts Payable
Money owed by a business to its suppliers and vendors for goods or services received.
Accounts payable (AP) represents the short-term obligations a business has to pay its suppliers, vendors, and creditors. It appears as a liability on the balance sheet and reflects bills that have been received but not yet paid.
How Accounts Payable Works
When a business receives goods or services on credit, it records the amount as accounts payable. The AP process typically involves: receiving an invoice, verifying the goods or services were delivered, matching the invoice to a purchase order, approving the payment, and finally processing the payment within the agreed terms (often Net 30 or Net 60).
For small businesses and freelancers, AP is often simpler — it's the stack of bills waiting to be paid, from the monthly internet service to the quarterly insurance premium.
Why It Matters
Effective AP management ensures you pay bills on time (avoiding late fees and damaged vendor relationships) while optimizing cash flow (not paying earlier than necessary). It also provides a clear picture of upcoming financial obligations, helping with budgeting and planning.
Proper AP documentation — keeping invoices, receipts, and payment confirmations — is critical for accurate bookkeeping and tax compliance.
Example
A design agency receives a $2,000 invoice from a freelance photographer with Net 30 terms. The amount is recorded as accounts payable on day one. When the invoice is paid 25 days later, the AP entry is cleared and the payment is recorded as an expense.
Related Terms
- Invoice vs Receipt — Understanding the difference
- Bookkeeping — Systematic recording of financial transactions
- Business Expense — Costs incurred in running a business
ReceiptBot helps you keep track of all your payment receipts and invoices from email. Try it free →