Accounts Payable (AP)
Quick Definition
Money a company owes to suppliers and vendors for goods or services received but not yet paid for, recorded as a current liability on the balance sheet.
Key Takeaways
- AP represents money owed to suppliers for goods/services received on credit
- It is a current liability that affects working capital and cash flow timing
- AP turnover ratio measures how quickly a company pays its suppliers
- Rising AP can signal either strong negotiating power or potential cash flow problems
What Is Accounts Payable (AP)?
Accounts Payable (AP) represents the short-term obligations a company owes to its suppliers, vendors, and creditors for goods and services that have been delivered but not yet paid for. Recorded as a current liability on the balance sheet, AP is a critical component of working capital management. When a company purchases inventory or services on credit terms (e.g., net 30 or net 60 days), the amount is added to accounts payable until payment is made. From a fundamental analysis perspective, AP trends reveal important information about a company's cash management strategy and supplier relationships. Rising AP relative to cost of goods sold may indicate the company is stretching payment terms to conserve cash — which can be a positive sign of negotiating leverage or a warning sign of cash flow difficulties. The accounts payable turnover ratio (COGS ÷ Average AP) measures how quickly a company pays its suppliers. A decreasing turnover ratio suggests the company is taking longer to pay, while an increasing ratio indicates faster payments. Analysts compare AP trends with inventory and receivables to assess the overall efficiency of working capital management.
Accounts Payable (AP) Example
- 1A retailer with $500M in annual COGS and $50M in accounts payable has an AP turnover of 10×, meaning it pays suppliers roughly every 36 days.
- 2When a company's AP days increase from 30 to 45 while competitors remain at 30, it may signal cash flow stress or aggressive working capital optimization.
Related Terms
Accounts Receivable (AR)
Money owed to a company by its customers for goods or services delivered on credit, recorded as a current asset on the balance sheet.
Working Capital
The difference between a company's current assets and current liabilities, measuring short-term financial health and operational efficiency.
Balance Sheet
A financial statement showing a company's assets, liabilities, and shareholders' equity at a specific point in time, following the equation Assets = Liabilities + Equity.
Cash Conversion Cycle (CCC)
The number of days it takes a company to convert its investments in inventory and other resources into cash from sales.
Current Ratio
A liquidity ratio measuring a company's ability to pay short-term obligations by comparing current assets to current liabilities.
Revenue
The total amount of money a company earns from its business activities before any expenses are deducted, also called sales or top line.
Expand Your Financial Vocabulary
Explore 130+ financial terms with definitions, examples, and formulas
Browse Fundamental Analysis Terms