Finance

Accounts Payable

Money a business owes to its suppliers and vendors for goods or services received but not yet paid for. Listed as a current liability on the balance sheet, it represents short-term debt typically due within 30 to 90 days.

The mechanic

When a vendor delivers goods or completes a service and sends an invoice, the company records the amount as a liability — accounts payable goes up by the invoice amount, and the corresponding asset (inventory, prepaid expense) or expense goes up by the same amount. When the company pays the invoice, cash flow goes down and accounts payable goes down by the same amount.

Common payment terms include "Net 30" (full payment due in 30 days), "Net 60", and "2/10 Net 30" (a 2% discount if paid within 10 days, otherwise full amount due in 30). Larger buyers often dictate longer terms to extend their working capital at suppliers' expense.

Why it matters financially

Accounts payable is a free source of short-term financing. The longer a company can stretch payables (within agreed terms), the less working capital it needs to fund day-to-day operations. The classic metric is days payable outstanding (DPO):

DPO = (Accounts Payable / Cost of Goods Sold) × 365

A high DPO is good for cash flow but can strain supplier relationships if pushed too far. A low DPO suggests the company is paying quickly — possibly capturing early-payment discounts, or possibly leaving cheap financing on the table.

Walmart and Amazon are famous for running high DPO; both use scale to negotiate long terms with suppliers and let the float fund operations. Suppliers, in turn, often factor those receivables to their own banks.

  • Accounts Receivable is the mirror image — money customers owe the company.
  • Trade payables is sometimes used as a synonym, but technically refers only to obligations to suppliers of goods or services, not to all current liabilities.
  • Notes payable are formal debt instruments (loans, bonds), reported separately and often longer-term.