How to Calculate Accounts Payable
What is Accounts Payable?
Accounts payable (AP) represents money a company owes to its suppliers for goods or services received but not yet paid for. Managing AP strategically — paying promptly enough to maintain good supplier relations but slowly enough to preserve cash — is a key treasury function.
Step-by-Step Guide
- 1When goods are received, AP increases by the invoice amount
- 2When the supplier is paid, AP decreases and cash decreases
- 3Days payable outstanding (DPO) = (AP / COGS) × 365
- 4Higher DPO = slower payment = more supplier financing of your operations
Worked Examples
Input
AP £80k · Annual COGS £960k
Result
DPO = 30 days
Average 30 days to pay suppliers