What is Accounts Payable... and What's Accounts Receivable?

Accounts payable is an account within an accounting system that records how much money you OWE other people or organisations.

For example, I buy 20 rabbits rabbit for $20 each and don’t pay the rabbit farmer yet because I have 60 days terms to pay.

So in the system, I’d record this as:

DEBIT - Rabbits - $400 in rabbits
CREDIT - Accounts Payable - $400 (this is the $400 I owe to the rabbit farmer).

Once I pay the rabbit farmer it looks like this:
DEBIT - Accounts Payable - $400
CREDIT - Cash for $400.

If we eliminate the Debit and Credit of accounts payable as one side will cancel the other out, we have a ZERO balance for accounts payable. What’s left is a CREDIT of cash being $400 (remember, credit of cash - an asset, means cash has GONE OUT) and your DEBIT of $400 worth of rabbits.

So in effect, accounts payable is there is manage how much you owe, once you pay it, the amount eliminates itself out of accounts payable and shows in your cash balance.

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