Accounts Payable Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Accounts Payable, written in plain English, along with examples of how it is used.

What is Accounts Payable?

n. a liability which has a credit balance, covering payments to suppliers owed money for goods and services

History and Meaning of Accounts Payable

Accounts payable is a term used in accounting that represents the amount owed by an organization to its suppliers and vendors for the goods and services they have provided. It is a liability, indicating that the organization owes money to its suppliers, and as such, it's listed on the balance sheet. This balance must be paid within a specific period, designated by the terms of the purchase agreement.

Organizations use accounts payable to manage their cash flow and expenses, defer payments to vendors until goods or services have been delivered or completed, and keep track of the amounts owed. Accounts payable is an essential component of an organization's financial management, as it represents the money owed to suppliers and vendors that can affect the company's credit rating.

Examples of Accounts Payable

Examples of accounts payable include expenses incurred by the company but not yet paid, such as bills for raw materials and supplies, rent, utilities, and salaries for employees. Another common example is expenses incurred through credit cards used by the organization to pay for business expenses.

Legal Terms Similar to Accounts Payable

  1. Accounts receivable: This refers to the money owed to a company for goods or services sold on credit. It is a current asset and is listed on the balance sheet.
  2. Liability: This refers to the amount of money owed by an organization to its creditors, including accounts payable. It's a crucial component of financial management, and liabilities must be managed carefully to ensure that the organization remains solvent.
  3. Debt: This term refers to the amount of money owed by an individual or an organization to a creditor, including accounts payable. It can be short-term, such as accounts payable or long-term, such as mortgage debts.