Accounts Payable (AP) tracks a business’s short-term obligations to vendors and suppliers. These unpaid invoices are recorded as liabilities since they represent amounts the business owes. AP is critical for managing cash flow, ensuring that bills are paid on time to avoid penalties or disruptions to supply chains. Efficient AP management helps maintain strong relationships with suppliers and protects the business’s creditworthiness.

AP balances fluctuate as businesses receive new goods and services and settle existing obligations. Many companies aim to extend payment terms as long as possible while maintaining good supplier relationships, freeing up cash for other uses.

Common Use Cases:

• Paying for office supplies, raw materials, or utilities.
• Managing cash flow by controlling payment schedules.
• Ensuring timely payments to vendors to avoid late fees.

Example:
A small bakery orders ingredients from a supplier and receives an invoice due in 30 days. The bakery records this invoice under Accounts Payable, planning to pay it on or before the due date to avoid interest or penalties.