Accounts Payable
Credit purchases, payment terms, and short-term financing.
Why This Matters
Almost no business pays cash for everything it buys.
A restaurant orders produce from a farm — invoiced Net 30. A manufacturer buys steel from a supplier — Net 60. A coffee shop orders cups, sleeves, and coffee beans — Net 15. In every case, goods change hands now and payment comes later.
Short-Term Financing
That gap between receiving goods and paying for them is a source of short-term financing. By taking 30 or 60 days to pay, you're essentially borrowing from your suppliers, interest-free.
The Obligation Risk
Accounts payable also creates obligation. Miss a payment, pay late, or mismanage your AP schedule — and you damage supplier relationships, lose favorable terms, and potentially trigger penalties.
Accounts payable is the most common current liability for a reason: nearly every business buys things on credit. Understanding AP means understanding how credit purchases work and how payment terms affect cash flow.
What Is Accounts Payable?
Accounts payable (AP) is the amount a company owes to suppliers for goods or services purchased on credit that have been received but not yet paid for. It's typically due within 30–90 days.
The AP Moment
You have an obligation →
Accounts Payable: $5,000
Key distinction: Accounts Payable is informal (based on trade credit from suppliers). Notes Payable is formal (written promissory note, usually with interest).
The Journal Entries
Entry 1: Purchasing on Credit
ABC Coffee Shop orders $4,500 of coffee beans. Invoice due in 30 days. Record when goods are received.
Date: January 10, 2026
Entry 2: Paying the Invoice
On February 9 (30 days later), ABC pays the invoice in full.
Date: February 9, 2026
Entry 3: Partial Payment
Sometimes you pay part of an invoice. Pay $2,000 of a $4,500 invoice.
Understanding Payment Terms
Payment terms are the conditions a supplier sets for when and how you pay. They're printed on every invoice and directly affect your cash flow.
| Term | Meaning | Example |
|---|---|---|
| Net 30 | Full payment due in 30 days | Due Jan 10 if dated Dec 11 |
| Net 60 | Full payment due in 60 days | Common for manufacturing |
| Net 15 | Full payment due in 15 days | Faster-moving industries |
| Due on Receipt | Pay immediately upon receiving invoice | Tight supplier relationship |
| 2/10 Net 30 | 2% discount if paid within 10 days; full in 30 | Most important to understand |
| 1/15 Net 45 | 1% discount if paid within 15 days; full in 45 | Variant of early payment discount |
| EOM | Due at End of Month | Invoice dated Jan 5 → due Jan 31 |
The Early Payment Discount: 2/10 Net 30
This is the most commonly tested payment term. It looks confusing but follows a simple pattern:
Should You Take the Discount? ($10,000 Invoice)
Option A: Pay on Day 10
- • Pay: $10,000 × 98% = $9,800
- • Save: $200
Option B: Pay on Day 30
- • Pay: $10,000
- • Use the $9,800 for 20 more days
The Math: Annualized Cost of Skipping
(Discount % / (1 - Discount %)) × (365 / Days saved)
= (2% / 98%) × (365 / 20)
= 2.04% × 18.25
= 37.2% annualized
Almost always take early payment discounts!
Journal Entry: Taking the Early Payment Discount
Scenario: $10,000 invoice, terms 2/10 Net 30. Paid within 10 days.
The $200 discount reduces the cost of inventory (or is recorded as a Purchase Discount, depending on the inventory accounting method).
AP Ledger & Month of Activity
A business typically has dozens or hundreds of suppliers. The Accounts Payable subsidiary ledger tracks the balance owed to each individual supplier.
ABC Coffee Shop - AP Ledger (January 2026)
| Date | Desc | Debit | Credit | Balance |
|---|---|---|---|---|
| Jan 5 | Invoice MR-1 | $3,000 | $3,000 |
| Date | Desc | Debit | Credit | Balance |
|---|---|---|---|---|
| Jan 12 | Invoice FF-2 | $1,500 | $1,500 | |
| Jan 22 | Payment (disc) | $1,500 | $0 |
The Control Account Relationship
The total of all supplier balances in the AP ledger must equal the Accounts Payable balance on the General Ledger ($3,000).
AP Aging Schedule
Shows how long invoices have been outstanding to avoid late payments.
| Supplier | Total | 0-30 | 31-60 | 60+ |
|---|---|---|---|---|
| Mountain R. | $3,000 | $3,000 | - | - |
| Bean Corp | $2,000 | - | $2,000 | - |
| Cup Supply | $500 | - | - | $500 |
Warning: Invoices in 60+ days risk supplier relationship.
AP Turnover & DPO
Measures how quickly a company pays its suppliers.
Example: Turn = 8.0
DPO = 365 ÷ 8 = 45.6 days
- <15 days: Paying too fast (missing float)
- 30-60 days: Standard trade credit
- >90 days: Stretching payables (cash stress)
Common Mistakes
Mistake 1: Recording Too Early
Recording AP when you place a Purchase ORDER.
Record AP when GOODS ARE RECEIVED.
Reason: Obligation doesn't exist until you have goods. You can cancel a PO; you can't cancel a received invoice.
Mistake 2: Missing the Discount
Paying $9,800 on a $10k invoice and only recording cash out. AP stays partially open.
Debit AP for full $10,000. Credit Cash $9,800. Credit Discount $200.
Key Takeaway
Accounts payable represents money owed to suppliers for goods and services received on credit. It's recorded when goods are received (not when ordered), and eliminated when payment is made.
Understanding payment terms — especially early payment discounts like 2/10 Net 30 — is critical for cash flow management. Almost always take early payment discounts; the annualized cost of not doing so is extremely high (often >36%).
Test Your Understanding
See if you've got the basics down. Click each option and check your answer.
Question 1: When should accounts payable be recorded?
Question 2: What does '2/10 Net 30' mean?
Question 3: ABC buys $8,000 of inventory on terms 2/10 Net 30. They pay on Day 8. What is the journal entry?
Question 4: A company's AP balance is $50,000 on Jan 1 and $70,000 on Dec 31. Annual purchases are $480,000. What is Days Payable Outstanding?
Question 5: True or False: A company should always wait until the last day of the payment term to pay invoices (to maximize float).
Ready to Practice?
You now understand how accounts payable is recorded and how payment terms work. The Practice Lab challenges you to record credit purchases, apply payment terms, and build an AP aging schedule.
Try the Practice LabWhat's Next?
We've covered when you owe suppliers. Next, we explore Unearned Revenue — when a customer pays you before you've done the work.