January 26, 2022


Accounting + Finance Blog

Accounts Payable (AP) Meaning and Key Explanations

Accounts Payable (AP) Meaning and Key Explanations

Accounts payable arise from owing outsiders a certain amount of money. Creditors are called “AP.” It was due to the adoption of IFRS, the term AP is mostly used in financial statements. In this article, let me explain it.

Definition of Accounts Payable (AP)

Accounts payable (AP) is the aggregate of all the amount the entity owes individuals who perform business transactions with them within a year. It can also be defined as the amount of money or resources the business owes outsiders in a year.

Key Explanations

Accounts payable are aggregates. It is the cumulation of all amounts an entity owes others. This includes and is not limited to trade payables, accrued expenses, and prepaid income. Trade payable emanated from the trades the business had done in the past. If the business sells Gas, anytime it purchases gas cylinders and does not pay immediately, it becomes trade payable.

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Accrued expenses are expenses that are yet to be paid for the year. For example, the business owner called an electrician to carry out maintenance. But the electrician was not paid immediately. The amount owed to the electrician becomes accrued expenses and as well AP.

It is also a source of funds to the entity. How? The entity can use this fund to achieve some goals. And allows the entity to enjoy some benefits without paying for them immediately. For example, the business can postpone payment to the generator repairer to a future date. This allows the business to use that money for other purposes on one hand. And enjoy the repaired generator for its business on the other hand. All this without paying any interest on the amount owed.

In addition, the entity can buy goods for resale on credit. It will earn from the goods before paying the creditor. Therefore, using account payables as a source of funds. More so, Accounts payable is less risky to the business and does not attract interest rates. The repairer will not request interest for the unpaid wage. Same with the creditors. However, most creditors may issue cash discounts, to encourage the entity to pay as soon as possible.

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What makes up Accounts payable (AP)?

The following items are aggregated as account payables in the statement of financial position.

Trade payables
Accrued expenses
Prepaid income

Saplet Petroleum Company is a business listed in the Nigerian Exchange Group. It can be found in the oil and gas sector. The AP includes the following:

Trade payables
Accruals and other payables
Pension payable
NDDC levy
Royalty payable

Nestle Nigeria, a manufacturing company, Its Accounts payable has this look:

Trade payables
Other payables and accruals
Trade payables due to other parties
Dividend payables

Where to find Accounts payable in a financial statement

Accounts payable can be found in the statement of financial position (balance sheet). It is a line item in the current liability section. In Nigeria, AP is called trade and other payables. Both terms have the same meaning. Also, note that banks don’t report AP as a line item. It has to show it as “other liabilities,” and so on.

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Accounts payable or AP are liabilities that are mostly paid within a year. In Nigeria, the term is also known as trade and other payables. It serves as a source of funds for a business. And it appears on the current liabilities section of the balance sheet. One example of it is accrued expenses.