The term "accounts payable" (AP) refers to an account within a general ledger that represents a company's obligation to pay its creditors or suppliers. The term "AP" is also used to refer to the business department or division responsible for making payments owed by the company to suppliers and other creditors.
During a particular point in time, a company's total accounts payable balance will appear in its current liabilities section on its balance sheet. In order to avoid default, accounts payable must be paid within a specified timeframe. Payments to suppliers are considered short-term debt at the corporate level. The payable is essentially a short-term IOU from one organization to another. Accordingly, the other party would record the transaction as an increase to its accounts receivable.
A company's accounts payable are an important part of its balance sheet. A higher AP indicates that the company is buying more goods or services on credit rather than paying cash. In other words, if a company's AP declines, it means the company is paying off its prior period debts at a faster rate than it is purchasing new items on credit. Managing an organization's accounts payable is essential to managing its cash flow.
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