Accounts Payable – Definition

Cite this article as:"Accounts Payable – Definition," in The Business Professor, updated February 16, 2019, last accessed July 11, 2020, https://thebusinessprofessor.com/lesson/accounts-payable-definition/.

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Accounts Payable Definition

Accounts payable refers to the money owed for a tradeable that a company has purchased on credit thereby it is a liability to the company. This is a debt in the business’ ledger. The origin of the debt is the purchase of a good necessary for operations. It represents a payment obligation and must count against any income. The liability of accounts payable concerns managers.

A Little More on Accounts Payable

Accounts payable are a credit for the company related to fiscal development. The credit is granted from a supplier, not from a bank differentiating it from a loan. Accounts payable represent financing without interest. In the supplier’s ledger, the loan is registered as accounts receivable, the reverse of accounts payable.

Accounts payable are classified based on the time period of financing, short-term (under a fiscal year) or long-term payables (over a fiscal year). Long-term accounts payable are reclassified as short-term payables if the loan matures in the next fiscal period.

Example of Posting to Account Payable

If a healthcare company needs a new sterilizer machine worth twenty thousand dollars, they could finance it through a company free of VAT. there would be a note on the debit side for the purchase amount of twenty thousand dollars against the suppliers’ account. The debt has been agreed to be paid in ninety days. The suppliers would then issue the healthcare company a commercial credit for ninety days, simplifying the financial process without involving financial institutions.

References for Accounts Payable Debit or Credit

  • https://www.investopedia.com/terms/a/accountspayable.asp
  • https://en.wikipedia.org/wiki/Accounts_payable
  • http://www.business-literacy.com/financial-concepts/accounts-payable-ap/
  • https://thelawdictionary.org/accounts-payable-ap/

Academic Research for Accounts Payable

  • Corporate trade credit and inventories: New evidence of a trade-off from accounts payable and receivable, Bougheas, S., Mateut, S., & Mizen, P. (2009). Journal of Banking & Finance, 33(2), 300-307. The study examines accounts payable from the incentivizing firms and trade credits. The model creates the response of this method in regard to the cost of inventories, profitability, and risk. The overarching aim was to identify the influence of accounts payable on the production channel. Their results support the use of the model.
  • System and method for a risk-based purchase of goods, Mandler, M. M., McLaughlin, A. P., Battenfelder, R. R., Rouen, J. E., Orbach, L. Y., Benson, C., … & Figliozzi, J. P. (1998). U.S. Patent No. 5,732,400. Washington, DC: U.S. Patent and Trademark Office. The patent discusses a method for enabling online transactional services among sellers and buyers. Research and tests are presented to authenticate the efficiency of the model. The patent also discusses further implications for the model.
  • System and method for project preparing a procurement and accounts payable system, Barnard, R. F., Baumann, C. S., Cirulli, P. J., Flannery, K. J., Lanuti, C. J., Munson, J. I., & Ritch, K. J. (2008). U.S. Patent No. 7,437,304. Washington, DC: U.S. Patent and Trademark Office. The patent presents a system for deploying to a client accounting installation a general procurement and accounts payable application. Research and tests are presented to authenticate the efficiency of the model. The patent also discusses further implications for the model.
  • Working capital management and profitability–case of Pakistani firms, Raheman, A., & Nasr, M. (2007). International review of business research papers, 3(1), 279-300. Raheman and Nasr specifically examine the effectiveness of accounts payable model in relation to Pakistani firms. In regards to the liquidation of accounts payable, the duo found a negative correlation. The study offers implications for the emerging Pakistani economy.
  • System and method for assessing a procurement and accounts payable system, Barnard, R. F., Cirulli, P. J., Flannery, K. J., Lanuti, C. J., & Murphy, J. M. (2010). U.S. Patent No. 7,702,533. Washington, DC: U.S. Patent and Trademark Office. The scholars present a method for assessing an accounts payable system. The patent is supported by research and tests are presented to authenticate the efficiency of the model. The patent also discusses further implications for the model.
  • System and method for project designing and developing a procurement and accounts payable system, Barnard, R. F., Cartin, L. J., Ciotoli Jr, L. M., Cirulli, P. J., Dauley, D. M., DeSantis, D. J., … & Stoke, H. D. (2004). U.S. Patent No. 6,714,915. Washington, DC: U.S. Patent and Trademark Office. The patent presents a system and method for project designing and developing a procurement and accounts payable system The patent is supported by research and tests are presented to authenticate the efficiency of the model
  • Financial reporting, tax costs, and book-tax conformity, Guenther, D. A., Maydew, E. L., & Nutter, S. E. (1997). Journal of Accounting and Economics, 23(3), 225-248. The article scrutinizes the role of book-tax conformity in relation to accounts payable systems. Looking at companies that were forced by government tax regulations to switch from cash methods to accrual methods, the researched observed little incentive for financing accounts payable.
  • In-kind finance: A theory of trade credit, Burkart, M., & Ellingsen, T. (2004). American Economic Review, 94(3), 569-590. Burkark and Ellingsen hypothesize that suppliers lend more liberally than financial institutions using a theoretical model of trade credit in competitive markets. The findings show the reason trade credit has short maturity, is more abundant in developing credit markets and explains the difference in the way large and small firms approach trade credit.
  • The determinants of trade credit: Evidence from Indian manufacturing firms, Vaidya, R. R. (2012). Vaidya analyzes the importance of trade credits in the Indian economy. Using empirical data, the study investigates the determinants of trade credit in the specific market. The results imply that inventory management is a large determinant of the importance of trade credit.
  • An agency model to explain trade credit policy and empirical evidence, Bastos, R., & Pindado, J. (2007). Applied Economics, 39(20), 2631-2642. Bastos and Pindado evaluate the trade credit policy from the agency theory. From the theory, the scholars created a model based on adverse selections and the moral hazard phenomena coming from seller and buyer relations. The findings support the usage of the model. The article concludes with implications of the findings.
  • Trade Credit, Bank Credit, and Flight to Quality: Evidence from French SME s, Psillaki, M., & Eleftheriou, K. (2015). Journal of Small Business Management, 53(4), 1219-1240. Psillaki and Eleftheriou investigate the impact of the global economic recession on trade credits, specifically in French SMEs. The findings support a flight-to-quality hypothesis. The article uses empirical data to create case studies suggesting the implications of the findings.
  • Local financial development and the trade credit policy of Italian SMEs, Deloof, M., & La Rocca, M. (2015). Small Business Economics, 44(4), 905-924. Deloof and La scrutinize the relationship between local economic development and trade credit. The results imply trade credit stimulate the formal finance of SME at a local level. The article uses empirical data from provincial banking in Italy to support the hypothesis. The evidence is used to analyze the role of trade credit in the global recession.

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