ACCOUNT PAYABLE

any amount owed by a company as the result of a purchase of goods or services from another company on a credit basis. Under a trade-credit arrangement, the purchasing company, after placing its order with the seller, receives the goods and an invoice denoting the price of the goods and the terms for payment. The purchasing firm does not send a trade acceptance or promissory note for payment but enters the amount owed as a current liability in its accounts. Companies incur this type of short-term debt primarily to finance their inventories; if inventory turnover is rapid within an industry, a company may be expected to have large accounts payable. Within any given industry, smaller companies are more likely to make use of this type of trade credit because they are less able to pay cash and take advantage of discounts than larger companies and have fewer sources of credit open to them. Accounts payable are a customary means of conducting domestic trade in the United States. In international trade and in the domestic trade of many European countries, the use of the acceptance and promissory note is common. Compare account receivable.