Construction Accounting Basis - What is Account Payable?

What is Accounts Payable (AP)?

Account Payable refers to the list of company’s liability and debt owed due to the purchased of goods or services. Taking delivery of ordered products without paying, purchasing on credit is recorded as account payable.

The Account Payable (AP) is an account that represents the company’s obligation to pay off its short-term debts to suppliers and creditors. It is also accountable for making payments by the company.

Understanding the Account Payable (AP)

The Account Payable appear on the Balance Sheet under the Liability section with the whole of all extraordinary amounts owed to suppliers or creditors. The payable is importantly a short term IOU (a document that acknowledges a debt owed) between two businesses. Therefore, the other party would record the transaction as an increase to its account receivables in the same figures.

Account Payable is a significant figure in the Balance Sheet. Over a prior period, if the AP increases, that means the company’s using payment on credit rather than paying cash. Conversely, it means the company is paying on its debts at a faster rate than purchasing new items on credit. The account payable management is crucial in dealing with a business’ cash flow.

Any changed amount of the Account Payable from the prior period appears on the Cashflow statement. Business’ owners could manipulate the AP to improve the cash flow status. For example, if management would like to increase cash reserves for a certain period, they can extend the payment time of outstanding liability and debt. However, this flexibility could be against the long-term relationships of the company has with its vendors. It is a good practice to pay bills by their due dates.

Key takeaways

Account Payable are amount due to vendors or suppliers for goods or services they received without payment.

The sum of all outstanding amounts owed is shown as the Liability on the Balance Sheet

The increase or decrease amounts in the Account Payable appears on Cash flow statement under the Operating section

The executive could choose to pay outstanding bills as close to the due dates as possible in order to improve cash flows.

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