What Is Accounts Payable: Meaning, Journal Entries & Role In Working Capital

Key Takeaways

1. Accounts payable is the money a business owes its suppliers in the short term. It impacts working capital and cash flow.
    
2. Three important metrics to track are: Accounts Payable Turnover, Days Payable Outstanding (DPO), and Cash Conversion Cycle (CCC)..
    
3. Delaying payments from 30 to 60 days can give a large cash flow.  At the same time, using early-payment discounts can reduce costs and maintain good supplier relations.
    

Accounts payable is the money a business owes to its suppliers for purchases made on credit. It’s a short-term liability that must be paid within an agreed time.

For example, a stationery shop buys printing paper worth ₹50,000 from a supplier on 30-day credit. Until payment is made, this amount is a liability (‘udhari’) and is recorded as accounts payable.
 

This shows how purchases on credit create a liability, which is cleared when payment is made. In short, accounts payable is like a short-term loan from your supplier, and that too without any interest (at least in most cases). It significantly impacts your working capital and cash flow management. 

Accounts Payable is a new term for a lot of beginners out there, and this blog is for you and them. We will learn what accounts payable are, how journal entries are prepared and how they impact your working capital.

Accounts Payable Ka ‘Uddashya’

Accounts payable (AP) is the money a company needs to pay its suppliers for goods or services it bought on credit. Usually, the payment is due within 30-90 days. On the balance sheet, AP is shown as a current liability, meaning the company has to clear it within a year. 

The table below describes the main functions of accounts payable.

For example, Indian Oil’s Days Payable Outstanding (DPO) increased from 31.5 to 33.0 days in June 2025. This showed how they extended payment cycles for better cash flow. 

Do you know, as of June 2025, Amazon’s Days Payable Outstanding was at 105.88 days, and in June 2024, it was 95.77 days?

Journal Entries for Accounts Payable

For Accounts Payable (AP) entries, we follow the double-entry system because this includes every transaction from the debit side to the credit side. Each journal entry must include the following details:

• Date: when the transaction occurred.
   
• Reference: invoice number or voucher ID.
   
• Narration: short description of transaction.
   
• Balanced Debit and Credit: both sides equal for accuracy.

With these details, let’s see the major journal entries for Accounts Payable.

1. Recording a Purchase on Credit

When a company buys goods or services on credit, it must record an increase in expense or asset and a liability towards creditors. This ensures that the purchase is recognised even though payment has not yet been made.

For example, XYZ Ltd buys raw materials worth ₹50,000 on credit from ABC Suppliers. The purchase increases inventory and creates a payable liability. The entry is as shown below:
 

This entry shows that XYZ Ltd now owns goods worth ₹50,000 but owes the same amount to ABC Suppliers. It helps track liabilities and ensures future payments are not missed.

2. Payment of the Liability

When the company makes a payment, the accounts payable liability decreases, and the cash/bank balance reduces. This clears the obligation to suppliers.

For example, on 15 April 2025, XYZ Ltd pays ₹50,000 to ABC Suppliers through its bank account, settling the liability.
 

This entry cancels out the earlier liability and reduces the bank balance. The supplier is now fully paid, and the books reflect no outstanding dues.

Role in Working Capital and Cash Flow Management

We have stated in previous sections that accounts payable is a major item on the current liabilities side. So, if there is a change in AP, there will be changes in the company’s working capital and short-term cash position as well. 

Working capital is the difference between a company’s current assets and its current liabilities. Short-term expenses and daily operations expenditure come under working capital..

Working capital = Current assets − Current liabilities.

For example, Amit runs an electronics store. He has current assets worth ₹12,00,000 (cash, inventory, receivables) and current liabilities of ₹7,00,000 (accounts payable, short-term loans).

So, Working Capital = ₹12,00,000 - ₹7,00,000 

= ₹5,00,000 

These ₹5,00,000 are the extra funds available for short-term operation and daily expenses. 

What else to measure with Accounts Payable?

Paying too quickly or too slowly is a bad decision. If you pay too quickly, cash flow (liquidity) will be affected. If you pay too slowly, there will be trust issues from the suppliers’ end. So, one must know when it is too soon or too late to pay. To help you with that decision, we have various Accounts Payable (AP)  metrics. Let’s see 3 of them in the table below.

By calculating them and adjusting your finances accordingly, you can improve your working capital directly. 

Abbreviations used in the table:
 

1. DPO (Days Payable Outstanding): The average number of days a company takes to settle its Accounts Payable.
    
2. COGS (Cost of Goods Sold): Direct costs of producing goods sold by a company (materials, labour, etc.).
    
3. CCC (Cash Conversion Cycle): The time it takes for a business to convert inventory and receivables into cash, net of payables.
    
4. DIO (Days Inventory Outstanding): The  Average number of days inventory is held before it is sold.
    
5. DSO (Days Sales Outstanding): Average number of days it takes to collect payment from customers after a sale.

Now, let’s take an example.

For example, ABC Traders, a wholesale distributor, makes annual credit purchases of ₹36,50,000 (₹10,000 per day). On average, it owes suppliers ₹3,65,000 in Accounts Payable. The company wants to measure how efficiently it handles supplier payments and follows the following steps.

Step 1. Accounts Payable Turnover Ratio

Formula: Accounts Payable Turnover = Net Credit Purchases ÷ Average AP

     = 3,650,000 ÷ 365,000 

      = 10 times/year

This means ABC Traders pays its suppliers around 10 times a year. This is a good and steady payment cycle.

Step 2. Days Payable Outstanding (DPO)

Formula: Days Payable Outstanding = 365  ÷  AP Turnover

    = 365 ÷ 10 

   = 36.5 days

This data means that on average, ABC Traders takes 37 days to pay its suppliers. This duration is perfect to look after both liquidity and supplier trust.

Step 3. Cash Conversion Cycle (CCC)

To calculate the Cash Conversion Cycle, assumptions are taken:

• Days Inventory Outstanding (DIO): 40 days
• Days Sales Outstanding (DSO): 30 days

Formula: Cash Conversion Cycle = DIO + DSO − DPO

         = 40 + 30 − 37 

         = 33 days

ABC Traders takes about 33 days to convert inventory and receivables into cash after accounting for its payables period.

The table summarises all three 3 data we have calculated.
 

Also, since ABC Traders are holding payables for approximately 37 days, they preserve cash longer. Because of it, they improve working capital flexibility without overburdening suppliers.

Conclusion

Accounts Payable is the money a business owes to its suppliers. It is necessary to maintain accounts payable to maintain working capital and liquidity. However, you can’t break the suppliers’ trust; that is why accounts payable must be tracked and controlled accurately. 

Frequently Asked Questions
 

What is reverse factoring (supply-chain finance), and how does it affect AP?
Reverse factoring lets suppliers get early payment from a bank; buyer risk is reduced, and liquidity improves.

How does foreign currency exposure affect accounts payable for importers?
FX fluctuations change payable amounts; hedging via forwards or options reduces risk and budgeting volatility.

What are the key criteria when choosing AP automation software?
Integration with ERP, invoice OCR, approval workflows, security, vendor portal, scalability, analytics, and cost-effectiveness requirements.

What tax considerations apply to Accounts Payable in India?
TDS applies to certain payments; GST input credits need correct documentation for claim and audit.

 

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