What is Accounts Payable?
Accounts payable (A/P) are amounts owed to suppliers and other creditors for goods and services bought on credit.How Does Accounts Payable Work?
Let's assume that Company XYZ orders $1,000,000 in widget parts from its supplier and has 60 days to pay for those parts. Once Company XYZ places its order and/or receives the parts, it will increase its inventory account by $1,000,000 and increase its accounts payable by $1,000,000. When 60 days has passed and Company XYZ pays the invoice, it will reduce cash by $1,000,000 and reduce its accounts payable by $1,000,000.
A/P is a liability, and as such, it appears on the balance sheet. In particular, A/P is a current liability, meaning that the amount owed is expected to be paid within the next 12 months.
When accounts payable go down, this is considered a use of cash on the company's cash flow statement, and as such, it reduces the company's working capital (defined as current assets minus current liabilities). When accounts payable goes up, this is considered a source of cash on the company's cash flow statement because the company is "stretching out" the time it takes to pay its invoices and thus not using cash as quickly.
