What Are Accounts Payable?
Accounts payable are financial obligations which require a company to pay suppliers and/or creditors in the near-term future. A company’s total accounts payable are identified and quantified on its balance sheet under the current liabilities section.
Company Use Case
When a company purchases goods or services via credit, rather than cash, they enter into an obligation to pay the supplier. The amount the company owes said supplier is logged on the balance sheet as an account payable. By making purchases with credit, companies have the ability to increase cash on hand. However, this practice may be viewed as cash flow manipulation as this cash will inevitable be used to pay off accounts payable in the future. Although a company may also elect to take on accounts payable if there is a more urgent matter requiring cash.
Examples Of Accounts Payables
So, now that we know why a company may elect to take on accounts payable, what kinds of items are companies taking on accounts payables to receive? Below is a list of some potential payables contents.
- Raw Materials
- Contracting
- Legal Fees
- Transportation
While these are a few common examples, it is important to remember that accounts payables may be obligated by any party, supplying any good or service.
Analyzing Accounts Payables
A company’s accounts payables do not tell us much as a stand alone metric. However, it is important to analyze a company’s liquidity and short-term financial health. If a company has accounts payable, it is not a problem. However, if a company has an overwhelming amount of accounts payable and too few assets to meet these obligations, this is troublesome. While analyzing current liabilities as a whole may be acceptable, it is important to understand the underlying obligations that make up this category and the urgency of each of them, including accounts payable.
