A company’s Accounts Payable (AP) are the short-term debt obligations owed to its creditors when it purchases goods or services. Accounts payable generally include amounts that must be paid within a 12-month period and are reported as current liabilities on the company balance sheet.
For example, Company A hires a lawyer to draft an employment agreement for a new employee. The lawyer sends Company A an invoice for $750, due within 30 days of receipt. Company A’s bookkeeper enters the invoice into their accounting system and records legal expenses of $750 with a corresponding accounts payable. When Company A pays the invoice with cash, accounts payable are reduced by the $750 payment.
A company can often get discounts by paying their accounts payable early. Many suppliers will offer early payment discounts, such as payment terms 2/10 net 30.