Introduction
Amazon owed its suppliers and third-party sellers $94.4 billion at the end of 2024, almost three times the $34.2 billion of inventory it held. Its annual report states the strategy plainly: the company seeks to turn inventory quickly and collect from consumers before its payments to vendors and sellers become due. Money owed to suppliers is not a burden for a business run this way. It is a source of funding, and a very cheap one.
Accounts payable and accrued liabilities are the operating liabilities that make that possible. They are recorded when a company has received goods, services or labor but has not yet paid for them, and together with receivables and inventory they make up working capital, the block of current items described in how the balance sheet works. They also deserve scrutiny, because the accrued lines in particular can contain items that are not operating at all, including debt.
Accounts Payable and Accrued Liabilities Compared
The difference between the two is whether an invoice has arrived. Accounts payable are amounts owed to suppliers for goods and services the company has received and been billed for. Accrued liabilities are costs the company has incurred but not yet been billed for or paid, recognized under accrual accounting so that the expense lands in the right period, as explained in accrual vs cash accounting.
- Accounts payable
Amounts a company owes to suppliers for goods and services it has received and been invoiced for but not yet paid. They are current liabilities and part of operating working capital.
In the three statements, both work the same way: the cost lowers pre-tax income when it is incurred, the liability rises by the same amount, and operating cash flow adds that increase back, so cash moves only when the bill is paid. Typical accrued liabilities include:
- Payroll: wages earned but not yet paid at the period end, bonuses, commissions and payroll taxes.
- Interest: interest that has accumulated on debt since the last payment date.
- Taxes: income, sales and property taxes owed but not yet paid.
- Operating costs: utilities, professional fees, freight and other services received before the invoice.
- Customer obligations: gift cards, rebates, return allowances and loyalty rewards, which are not costs but are often reported in the same caption.
- Accrued liabilities
Expenses a company has incurred but not yet paid or been invoiced for at the balance sheet date, such as wages, interest, taxes and services received. They are recorded so that costs are matched to the period in which they arise.
Why Accruals Matter at the Period End
Accruals are largely estimates made at the close of each period. A company records wages earned since the last payday, interest built up since the last coupon date, and bonuses earned so far against annual targets, then reverses or settles them in the following period when the actual amounts are known. Bonus accruals are the most judgment-heavy: management estimates how much of the annual bonus pool employees have earned to date, and a cautious or generous estimate moves quarterly earnings. Because the matching principle described in recognition and matching requires costs to land in the period they are incurred, an under-accrual flatters the current period at the expense of the next.
What Hides in Accrued Expenses
Companies often present accrued liabilities in a single broad caption. Amazon's 2024 annual report shows its current liabilities as follows:
| Line item | Dec 31, 2023 | Dec 31, 2024 |
|---|---|---|
| Accounts payable | 84,981 | 94,363 |
| Accrued expenses and other | 64,709 | 66,965 |
| Unearned revenue | 15,227 | 18,103 |
| Total current liabilities | 164,917 | 179,431 |
Source: Amazon 2024 annual report. Accrued expenses and other include payroll-related liabilities of 7.5 billion and unredeemed gift cards of 5.4 billion at December 31, 2024, among other items.
The note behind the accrued caption lists tax-related liabilities, current lease liabilities and asset retirement obligations, self-insurance liabilities, payroll, current debt, unredeemed gift cards, customer and marketing liabilities and acquired digital media content. With no separate line for current borrowings, the $5.0 billion current portion of Amazon's long-term debt at the end of 2024 sits inside that caption, alongside $151 million drawn on short-term credit facilities that the debt note places there explicitly. A banker who treats the whole caption as operating working capital would miss debt that belongs in the bridge to equity value; how borrowings are classified between current and long-term is covered in debt on the balance sheet.
The usual classification of the lines found in payables and accruals looks like this:
| Balance | Behaves like | Usual treatment in a deal |
|---|---|---|
| Trade accounts payable | Operating working capital | Included in the working capital peg |
| Accrued payroll for the current period | Operating working capital | Included in the peg |
| Unpaid bonuses for prior periods | Debt-like | Deducted from the price |
| Accrued interest | Debt-like | Deducted with the debt |
| Income taxes payable | Tax liability | Usually deducted or covered by a tax indemnity |
| Current debt and finance leases | Debt | Included in net debt |
| Gift cards and customer deposits | Operating, sometimes debt-like | Negotiated case by case |
| Litigation accruals | Debt-like | Deducted or covered by an indemnity |
The dividing line is whether a balance recurs as part of running the business. Trade payables and current payroll roll over every month, and a buyer needs a normal level of them to operate. A prior-year bonus, accrued interest or a litigation settlement belongs to the past: the buyer pays it in cash after closing and receives nothing in return.
How Payables Fund Operations
The time a company takes to pay its suppliers is measured by days payable outstanding (DPO), payables divided by cost of goods sold or purchases, multiplied by the days in the period. A longer DPO means suppliers are financing more of the business. Retailers and marketplaces with strong bargaining power, like Amazon and Costco, operate with payables larger than their inventory; small companies with weak bargaining power pay faster and must fund more of their inventory themselves. How DPO combines with receivable and inventory days into the cash conversion cycle is covered in working capital drivers.
Paying suppliers later releases cash, but only once. If a company extends its average payment period from 45 to 60 days on $1.2 billion of annual purchases, payables rise by about $50 million, and operating cash flow is higher by that amount in the year of the change. The following year, cash flow returns to normal unless terms are stretched again. A jump in operating cash flow driven by payables is therefore a one-time benefit, not a sustainable improvement.
Supplier Finance Programs
Some companies extend payment terms through supplier finance programs, in which a bank pays suppliers early at a discount and the company pays the bank later. The payables remain on the company's balance sheet, usually still within accounts payable, which can make the arrangement look like ordinary trade credit even though it behaves partly like borrowing. Since Accounting Standards Update (ASU) 2022-04, companies must disclose the key terms of such programs and the confirmed amount outstanding, and, as Deloitte's summary of the supplier finance disclosure standard explains, an annual roll-forward of those obligations. Whether to treat them as debt is a judgment covered in supplier finance and factoring.
What Bankers Do With Payables and Accruals
In valuation and modeling, operating payables and accruals are forecast as part of working capital, usually through days or percentage-of-cost assumptions, and their changes flow into operating cash flow. In a sale, they matter in three specific ways:
- The working capital peg: a seller who delays supplier payments before closing keeps the cash and leaves the buyer to pay the overdue invoices, so the working capital delivered at closing is trued up against a peg set on normalized averages.
- Debt-like items: accrued interest, unpaid bonuses for a period before closing, deferred compensation and tax liabilities are usually deducted from the purchase price rather than left in working capital.
- Completeness: diligence tests whether all costs incurred before the period end were accrued, because under-accrual flatters both profit and working capital.
Payables and accruals look like the dullest lines on the balance sheet, yet they explain how much of a business is funded by its suppliers and employees, and they are where debt-like items are most often overlooked. How buyers test them in a sale process is covered in quality of earnings.
