Definition: Accounts payable, also called trade payables, is a short-term liability account used to record debts from purchasing goods or services on credit. Primarily this account is used to record inventory purchases from vendors and other trade debts, but it is also used for supply, equipment, and service purchases. Other expenses like taxes are often included in the account payable account balance.
What Does Accounts Payable Mean?
What is the definition of accounts payable? Inside the A/P ledger, each creditor is listed separately with its current balance. An accounts payable detailed aging report lists all of the current creditors with their account balances listed in amounts due or overdue in days. For example, the most common aging reports list account balances in 0-90 days, 91-180 days, and 181+ days. This shows the amounts that are outstanding for these time frames.
Example
Tim’s Tool Company purchases hammers on credit for $100 from a vendor on January 1. This $100 would show up on Tim’s 0-90 day aging report because the debt is less than 90 days old. Let’s assume it’s April and Tim still hasn’t paid the $100 to his vendor. Tim’s aging report would then move the $100 to the 91-180 day column because now the debt is over 90 days old. In essence, the aging report is a way for companies to track how long accounts have been outstanding and their balances. When Tim finally pays the vendor, the $100 balance is removed from the A/P account and the aging report.
Since A/P is a current liability account, it maintains a credit balance and is reported on the current liabilities section of the balance sheet. Account payables are usually listed first in the liabilities section because they are the most current. Since these are trade debts, they are usually repaid in 90 days unlike short-term notes payable that could be outstanding for the entire year.
Summary Definition
Define Accounts Payable: A/P means a trade debt that one company owes another for purchasing inventory, materials, or other goods on account without paying from them before their delivery.
