Accounts Payable 101: What is an AP increase?

When accounts payable (AP) professionals talk, it can seem like a foreign language.

But you don't need Duolingo or Google Translate to unjumble the jargon. Understanding a few key concepts and terms will give you a solid foundation that allows you to successfully navigate the world of accounts payable.

In this blog post, we'll explore the definition of an "AP increase" and how it impacts your organization's finances.

Featured Resource: How to track, benchmark, and improve your Accounts Payable KPIs

Download Your Free eBook

Understanding accounts payable

To understand an AP increase, you first need to understand what's meant by 'accounts payable'.

"Accounts payable – money a business owes suppliers for goods or services purchased on credit"

AP is considered a short-term debt and appears on your balance sheet as a liability. In other words, if your company has zero accounts payable, it would either mean that you've purchased nothing on credit or paid off all debts.

An "AP increase" occurs when an organization makes a purchase from a vendor on credit and then that vendor sends your organization an invoice for the purchase. As an example, if your company is renting building space, you would receive an invoice for the rent from the property owner. Your company would then debit the rent expense and credit it to accounts payable.

What causes an AP increase?

An AP increase occurs when you have an unpaid invoice from a vendor. Because of this, any credit purchase by your organization will lead to an increase in your accounts payable.

Is an AP increase considered a debit or a credit?

As accounts payable is a liability, an AP increase is considered a credit entry. This balance tells you how much money you owe to a supplier. When the credit balance is paid, your company debits accounts payable, which in turn, decreases the credit balance.

How does an increase in AP impact cash flow?

An increase in AP does not directly affect cash flow. However, it does correspond to the future cash needs of your company. Let's return to the above example regarding the rent your business pays on its office. Assume that the property owner sent you the January invoice and that you recorded it as described above, but then decided not to pay the invoice, instead holding onto your cash. Each subsequent invoice would increase your AP, but there would be no direct consequences to your cash until payment was made.

Though it seems counterintuitive, this means that an increase in AP can also improve cash flow in the short term. When payments are delayed, this can free up cash for other expenditures. However, it also increases the risk of penalties, strained vendor relationships, and even potential supply chain disruption.

Featured Resource: How to track, benchmark, and improve your Accounts Payable KPIs

To discover how Quadient AP can help you optimize your AP process, including mastering your payables metrics, book a demo today!