Accounts payable is an accounting term that means value owed by a business to its suppliers, contractors, vendors and to whomever else it owes money. Accounts payable are listed as debts on a company’s balance sheet. In proper “double entry” accounting, any increase or decrease in accounts payable should be offset for an equal and opposite entry in another category, such as cash or inventory.
For example, if a store purchases $10,000 inventory on credit, it must enter a $10,000 debit on its balance sheet and a $10,000 credit to its inventory on hand.
Increasing accounts payable indicates that a company is purchasing more of its goods and services on credit, rather than paying cash for them. This may indicate that the company’s operations are becoming riskier.
In accrual basis accounting, which measures a company’s income based on expected cash flows rather than cash on hand, accounts payable represent costs that must be deducted to determine a company’s income and assets.