Accounts payable (AP) is when a company makes purchases from a vendor on credit that needs to be paid. Since accounts payable are a form of debt, it’s shown as a liability on a company’s balance sheet under short-term (or current) liabilities.
When managed poorly, accounts payable can affect more than just the credit line of a company. Recorded as a debit, it must be paid off within a given period to avoid default.
The short answer? Cashflow. Accounts payable and accounts receivable are two key factors that can make or break a business as it affects the total amount of money being transferred in and out of a business.
Your business should always be aware of how much it owes to other businesses. Maintaining a positive cash flow thus becomes integral in keeping your business afloat, hence the importance of the accounts payable process.