Accounting Fundamentals Certification (AFC) Practice Test

The term "Accounts Payable" refers to the amounts that a business owes to its creditors for goods and services that have been purchased on credit. This is a crucial component of a company's balance sheet and indicates the company's short-term liabilities. It represents the commitments the business needs to fulfill, which often arise from credit transactions where payment is deferred to a later date.

When a company incurs expenses or acquires goods without immediate cash payment, these costs are recorded as accounts payable until they are settled. This concept is essential for understanding cash flow management and the overall financial health of an organization.

The other terms provided hold different meanings: equity refers to the ownership interest in a business, cash is the currency held by the business, and accounts receivable represents amounts owed to the business by its customers. Each of these has its distinct role in accounting but does not pertain to what a company owes to its creditors.