Accounts payable refers to the money a company owes its suppliers for goods and services that have been provided and for which the supplier has submitted an invoice. (This makes accounts payable different from accrued expenses, which do not have invoices to match.)
Accounts payable appear under liabilities on the balance sheet. As current liabilities, they must be paid within the current 12-month operating cycle of the business. Often the payment terms are short (in full within 30 days, often called “net 30”) because the supplier’s claim is unsecured, meaning it cannot force the sale of the company’s inventory or collection of accounts receivable to ensure repayment.
Companies settle their accounts payable as they collect accounts receivable—the money they are owed by customers.
More about accounts payable
The balance sheet below shows ABC Co.’s accounts payable along with its other current liabilities. These liabilities are listed according to the urgency of their payment terms, from most urgent to least. Because the accounts payable must be paid within 30 days, they are the most urgent of the current liabilities and have first claim on the company’s cash.
With $55,000 in accounts receivable to cover $20,000 in accounts payable, ABC Co. is in a healthy position.