Accounts payable: Overview, definition, and example
What is accounts payable?
Accounts payable refers to the amount of money a business owes to its suppliers, vendors, or creditors for goods or services that have been provided but not yet paid for. It represents short-term liabilities on the company’s balance sheet and is a critical part of managing business cash flow. Essentially, accounts payable is the money your business needs to pay for the items or services it has already received but hasn't paid for yet.
For example, if your business orders office supplies and agrees to pay within 30 days, the amount you owe for those supplies is considered accounts payable until the payment is made.
Why is accounts payable important?
Accounts payable is important because it directly impacts your business’s cash flow and financial health. Effectively managing accounts payable ensures that your business can maintain good relationships with suppliers, avoid late fees or penalties, and keep the necessary cash on hand for operations. Mismanagement of accounts payable can lead to cash flow issues, supplier dissatisfaction, or damage to your business’s credit reputation.
For SMBs, tracking accounts payable is essential for managing expenses, staying on top of due dates, and maintaining financial stability. It also helps in budgeting and forecasting to ensure that you have the funds available to meet these obligations.
Understanding accounts payable through an example
Imagine your small business purchases $1,000 worth of inventory from a supplier with a payment term of 30 days. When the order is delivered, you create an accounts payable entry for $1,000 to track the amount owed to the supplier. You now have 30 days to pay the supplier, and during this period, the amount due is considered an accounts payable liability.
In another example, if your business uses a service like an internet provider, the monthly bill for the service would be listed under accounts payable until it is paid. This helps you track all outstanding payments that need to be made to vendors.
An example of accounts payable in action
Here’s how accounts payable might be referenced in a business context:
“As of the end of the month, the company has accounts payable totaling $5,000 for outstanding invoices from various suppliers. These amounts are due within 30 days and will be paid according to the agreed-upon terms.”
Conclusion
Accounts payable refers to the amounts a business owes to suppliers, vendors, or creditors for goods and services received but not yet paid for. For SMBs, keeping track of accounts payable is crucial for managing cash flow, meeting payment deadlines, and maintaining good business relationships. By staying organized and up to date on accounts payable, businesses can ensure they meet their financial obligations while avoiding penalties and keeping operations running smoothly.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.