Accounts Payable Defined
Accounts payable is a current liability account on the balance sheet. The account represents the company’s short-term financial obligations to creditors and suppliers – goods and services the company has already received but not yet paid for. It is considered a short-term liabilities account because the payables are due within one year or one operating cycle.
Money in accounts payable is essentially an interest-free loan from suppliers. Often, suppliers offer a discount for early payment. When deciding whether or not to pay early in order to get the discount, it is necessary to compare the value of the discount to the company’s borrowing costs.
If the benefit of the discount exceeds the cost of borrowing, then the company is better off making the early payment. But if the benefit of the discount is less than the cost of borrowing, then the company is better off waiting until the payable is due.
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