Accounts Payable (AP) refers to the amount a business owes to its suppliers or vendors for goods and services purchased on credit. It is recorded as a short-term liability on the balance sheet and represents outgoing cash obligations.
How It Works:
- A business purchases goods/services on credit.
- The supplier issues an invoice with a payment term (e.g., 30 or 60 days).
- The amount is recorded under Accounts Payable.
- The business pays the invoice within the due date.
- The liability is cleared from the books.
Benefits:
- Helps maintain cash flow flexibility
- Enables businesses to buy now and pay later
- Strengthens supplier relationships when managed properly
- Allows better working capital management
Example:
A retailer purchases inventory worth ₹3,00,000 on 30-day credit. This amount is recorded as Accounts Payable and is paid to the supplier after 30 days.