Your Ask Joey ™ Answer

What is accounts payable (AP)?

First, accounts payable is often referred to as “AP! Accounts payable is one of the main current liability accounts on a company’s balance sheet. AP represents amounts that the company owes to supplier or vendors, and those amounts must be paid within the next 12 months (i.e. that is why they are current). For example, if Billy’s Burgers buy organic burger patties from Bighorn Ranch, and no cash is exchanged when the burger patties are delivered, then Billy’s Burgers would record AP and Bighorn Ranch would record accounts receivable (AR).

A company would only record an accounts payable if they do not pay the supplier or vendor in cash on the transaction date. Instead, the company would receive an invoice that requires payment at a future date (i.e. 30 days from the invoice date). Therefore, AP is only recorded if the the company chooses to pay at a later date.

How does accounts payable impact a company’s cash flow balance?

When accounts payable increases, that means the company is deferring the payment of cash to suppliers or vendors. If accounts payable increases, then cash flow increases. If accounts payable decreases, that means the company paid their suppliers, which results in a decrease to cash flow.

How does accounts payable impact a company’s net working capital?

An increase in net working capital increases current liabilities. When current liabilities increases, the company’s net working capital decreases (meaning they have less free cash available).

What is the journal entry to record accounts payable?

When a company receives goods from a supplier or vendor, but chooses not to pay them, they would credit accounts payable. The debit would be to an expense account and would be based on what the company purchased.

Back To All Questions

You might also be interested in...

  • How to calculate days payable outstanding (DPO)?

    Days of payables outstanding is a metric that reflects the average time (generally in days) that an organization will take to pay off its debt outstanding. Generally, a higher days payables outstanding ratio will indicate that it takes a company a longer amount of time to pay off its bills.

  • What does it mean if days payable outstanding increases?

    Days payable outstanding (DPO) measures how many days it takes for a company to pay their outstanding invoices (accounts payable). If the company’s DPO increases, it likely means they are taking longer to pay outstanding invoices. A company could purposely delay the payment of invoices to increase cash available. Just be careful as you might...

  • Does a debit to a liability account increase or decrease the balance?

    A debit to a liability account on the balance sheet would decrease the account, while a credit would increase the account.  For example, when a company receives an invoice from a supplier, they would credit accounts payable to record the invoice.