🎓 Prepared by students from Boğaziçi University

What is Accounts Payable?

Accounts payable (AP) is the money a business owes to its suppliers and vendors for goods or services purchased on credit. It's a current liability on the balance sheet and one of the first accounts every accounting student learns to track.

Short answer

Accounts payable is a short-term liability representing amounts a company owes to suppliers for purchases made on credit but not yet paid.

The Accounts Payable Cycle

1
Purchase Order
Company orders goods or services from a supplier.
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2
Invoice Received
Supplier delivers goods and sends an invoice; AP is recorded as a liability.
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3
Invoice Approved
Accounting matches the invoice to the purchase order and receipt (3-way match).
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4
Payment Made
Company pays the supplier by the due date, reducing the AP balance.

Step-by-step worked examples

A bakery buys $12,000 of flour on credit, terms net 30. How does this affect Accounts Payable?

Debit Inventory $12,000
Credit Accounts Payable $12,000
Accounts Payable balance increases by $12,000 until paid.

The bakery pays $8,000 of that invoice early under terms 2/10, net 30 (2% discount if paid within 10 days). How much cash is paid and what happens to AP?

Discount = 8,000 × 0.02 = $160
Cash paid = 8,000 − 160 = $7,840
Debit Accounts Payable $8,000 · Credit Cash $7,840 · Credit Purchase Discounts $160

At month-end the bakery has three unpaid supplier invoices: $5,000, $3,200 and $1,750. What is the total Accounts Payable balance?

5,000 + 3,200 + 1,750 = $9,950
Total Accounts Payable = $9,950

Flashcards

Quick quiz

Q1.Accounts payable is classified as a…

Correct answer: B. AP is money owed to suppliers, due within a year — a current liability.

Q2.Which entry records a $5,000 credit purchase of supplies?

Correct answer: B. Buying on credit increases the asset (Supplies) and the liability (AP).

Q3.Paying off an accounts payable balance…

Correct answer: B. Cash (asset) decreases and AP (liability) decreases by the same amount.

Q4.Which best describes accounts payable?

Correct answer: B. AP specifically refers to short-term amounts owed to suppliers/vendors.

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Common mistakes

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Confusing accounts payable with accounts receivable. — Correct: AP = what you owe (liability); AR = what's owed to you (asset).

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Treating accounts payable as an expense. — Correct: AP is a liability on the balance sheet, not an expense on the income statement — the expense was recorded when the purchase happened.

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Forgetting to record AP until cash is paid. — Correct: Under accrual accounting, AP is recorded when the invoice/obligation arises, not when cash changes hands.

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Ignoring early-payment discounts. — Correct: Terms like 2/10 net 30 can meaningfully lower costs — track them separately from AP.

FAQ

What is accounts payable?

Accounts payable is a current liability — money a business owes to suppliers for goods or services bought on credit, due within a year.

What are some accounts payable examples?

Unpaid supplier invoices for inventory, utility bills, rent, and services received but not yet paid for.

How is accounts payable recorded in a journal entry?

Debit the asset/expense received (e.g., Inventory) and credit Accounts Payable; when paid, debit AP and credit Cash.

What is the difference between accounts payable and accounts receivable?

Accounts payable is money you owe others; accounts receivable is money others owe you.