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What is accounts payable?

Accounts payable is the money that an entity owes to external vendors and service providers for products and / or services received. In other words, accounts payable is a company's obligation to pay off a short-term (current) liability to its creditors. The short-term to pay off the debt can look like this 1/10, net 30 which means if you pay within first 10 days you will get 1% discount, if not you need to pay within 30 days without receiving any discounts.

Payable entries include recording all approved expenses for the goods rendered to the company by some other organizations (suppliers). Accounts payable is balance sheet account which has normal credit balances. This means that if an entity has more accounts payable it increases its borrowings. Accounts payable needs to be debited accordingly in order to show that the firm owes more. On the other hand, if the company paid those liabilities partially or in full then this account should be credited in order to reduce the account and show that it owes less or nothing to the creditors.

For example,

If a company purchased inventory on account*
If a company paid the debt off
Dr. Inventory↑
Cr. Accounts payable↑
Dr. Account payable↓
Cr. Cash↓

*purchase on account means the firm received goods now, but will pay for them later

When a company purchases assets on account, it is sort of like a borrowing process because the firm creates liability (debt). This company has a strong obligation to pay in the future the amount owed when it comes due. Accounts payable is a current liability account. Current debts meant to be paid off within the contract terms, but no longer than a year or one operating cycle, whichever is longer. If an entity cannot fulfill this expectation then it should try to negotiate the terms of their contract and change them if possible for some longer period. Good communication should be held in order to expand the payment window and avoid potential problems with the supplier or other borrower.

Commonly companies may be offered a waiting period and even some discount to encourage early payments to customers (especially major clients) to keep them and make with them constantly business. Other deals might be offered to encourage customers’ early payments. All borrowing companies realize that the longer a client won’t pay for the product the less likely he will pay it at least some day.

Whether it is good or bad to have lots of liabilities?

There is no right or wrong answer on this question. Each company has its own strategies in business. Usually big companies have borrowings and it is a normal course of business. Companies commonly include in the price of their products cost plus percentage for growth. If they don’t have enough money to finance certain project they need to borrow them from a bank as the financial institution or other creditors. That’s why when you see that a company has huge borrowing on its financial statements you shouldn’t make any conclusion without further analyzing the data. This amount of liabilities doesn’t necessary mean the bad thing. It might be just a sign that some important project going on there which may boost the company’s earnings.

On the other hand, everything should be reasonable and in balance. If borrowing is way too huge in comparison to the firm’s assets then this firm might be at risk of not meeting its obligation as well. If the entity fails to pay their obligations on time when they come due, it might be considered to be in default (bankruptcy). Accounts payable is one of most important accounts on the financial statements that the investors and creditors should look at in order to make the right decision about overall financial situation of the firm.