What are accounts payable?

Published 15 September 2026

Definition

Accounts payable are amounts the business owes suppliers for goods or services already received but not yet paid for. They sit as a current liability on the balance sheet.

The equations

Days payable outstanding = (Payables ÷ Purchases) × Days in periodCash conversion cycle = Days inventory + DSO − DPO

Al-Waha's figures

DPO = (78,900 ÷ 290,800) × 90 = 24.4 days

The cash conversion cycle - the whole picture

This is the most important working-capital equation, and it links three pages of this glossary:

Days inventory        43.7  ←  goods wait in the warehouse+ DSO                 18.9  ←  then wait at the customer− DPO                (24.4) ←  less what suppliers financed= Cash conversion cycle 38.2 days

What the number means: Al-Waha funds 38 days of its own operations. On average it pays suppliers 38 days before it collects from customers. The funding required:

Trade working capital = Inventory + Receivables − Payables                      = 141,200 + 96,750 − 78,900                      = SAR 159,050

That amount is permanently locked in the operating cycle, and it grows as sales grow - which is precisely why Al-Waha's cash fell despite the profit.

How to shorten the cycle, in order of practicality:

Reduce days inventory (the largest component at 43.7 days).
Reduce DSO (19 days, with limited room to improve).
Extend DPO - by negotiating better terms, not by paying late on agreed ones.

When is an early-payment discount worth taking?

A supplier offers 2% off for payment within 10 days, otherwise net 30.

Implied cost of declining the discount:= (Discount ÷ (1 − Discount)) × (365 ÷ (Net days − Discount days))= (0.02 ÷ 0.98) × (365 ÷ 20)= 0.0204 × 18.25= 37.2% per year

Turning down 2% to defer payment by 20 days is equivalent to borrowing at 37% annually. If you have the cash, the discount is almost always worth taking. The decision only changes when cash itself is scarce - at which point the cost of not holding cash is higher still.

Accounts payable vs. accrued expense

	Accounts payable	Accrued expense
Is there a document?	Yes, a supplier invoice	No, the invoice hasn't arrived
Amount	Precisely known	An estimate
Example	A supplier's goods invoice	Electricity consumed but not yet billed
Originates from	Recording the supplier bill	A period-end adjusting entry

Confusing the two is common, and the effect is that real costs are not recognised in the correct period, so profit is overstated.

Common mistakes

Mistake	Effect
Recording the supplier bill on payment rather than receipt	The expense falls in the wrong period and input VAT is claimed on the wrong return
Using late payment as a standing liquidity policy	Supplier terms deteriorate, discounts are lost, and pressure moves down the chain
Not reconciling supplier statements regularly	Duplicate or missing invoices surface a year later, usually in the supplier's favour
Skipping purchase orders	Nothing to match invoice price and quantity against

Frequently asked questions

Is a high payables balance a bad sign?

Not necessarily. A high balance with payment inside terms means free financing from suppliers, which is good. A high balance with payment beyond terms signals cash pressure.

What is the difference between payables and a loan?

Payables are an operating liability arising from purchasing, usually interest-free and short-term. A loan is a financing liability with interest and a repayment schedule.

When should a supplier bill be recorded?

On receipt of the goods or service, at the invoice date, not on payment. That is what puts the expense in its correct period.

How do I reconcile a supplier statement?

Compare the supplier's stated balance to their account in your books and explain every difference: unrecorded invoices, payments not yet received, credit notes, or discounts not applied. Reconciling monthly prevents differences accumulating into something nobody can explain later.