Is Account Payable A Current Liability?

It is significant to understand that AP is a typical current liability on the balance sheet of most organizations. So, what is mean the term “current liability” and is AP always included in this line? Let's break it down.

A current liability refers to a financial obligation that is due within the current accounting period, or in other words, within the current fiscal year.

A current liability is a creditor right where the related payment is due within the entity’s current accounting period or the next twelve months.

Common examples include:

- Accounts payable – What customers owe to the business for the goods or services that have been bought on credit.
- Accrued expenses - Costs that have been received or consumed by the company but have not been paid by the end of the reporting period (e.g. wages, interest, taxes).
- Current liabilities – These are liabilities that are due to be paid within the next twelve months (explain, for example, bank loans, bonds)
- Current portion of long-term debts – The amount of the long-term debts that would be payable in less than one year.
- Other revenues – Revenues that are received before providing the related product or service (e.g. Subscription, Gift certificates).

Current liabilities in the balance sheet are normally classified based on the time within which the amount is due. They are also used to assess the short-term solvency of a company since most of the assets and liabilities items are taken at a cost or value on the balance sheet date. Current assets must be more than current liabilities because current assets are the assets that are used in payment of current obligations as they mature.

Key Accounting Definition

In accrual accounting, following the matching principle, expenses should be reported in the same cycle as the revenues that they helped earn. This is not ideal since it results in many assets that were accumulated expenses or revenues being reported in the balance sheet.

To classify a liability as current is to state that it is probable that the amounts shall be paid soon by using the operating cash flows of the business. Noncurrent liabilities are those that have longer periods to be paid usually more than 1 year hence they are paid in proportions over time.

The question that can be asked is whether accounts payable is a current liability.

I would presume that accounts payable is generally considered a current liability in most cases for the following reasons.

First, AP denotes accounts payable which can be short-term financial responsibilities of a business to meet inventory, supply, or any other operating expenses. These are usually made on terms of less than 90 days and are normally paid out when due. This conforms with the current concept since the amounts will be paid within the next year.

Second, accounts payable directly relate to operating assets and expenses and the regular procurement process of a company. This means it adheres to the matching concept in accrual accounting. These amounts are the liabilities incurred from the business operations, not for the construction of a power plant, for instance. This is consistent with matching the operating expenses against the same reporting period by treating AP consistently as a current liability.

Last but not least, accounting for accounts payable as a current liability offers a more realistic view of accessible cash resources within the nearest time. Because AP is a liability that must be paid soon it is found under other current liabilities which represents the total sum of money that is owed within the next year to operate the business. Regarding the payment of its outstanding debts, AP also provides vendors and creditors with the time when they can expect to be paid.

Accounts payable as current liabilities may be subject to the following exceptions:

The reader needs to understand that accounts payable are normally classified as current liability; however, some exceptions allow a part of it to be considered as non-current or long-term on the balance sheet. This arises when the payment period is stretched beyond one year, a common practice for especially huge or exotic goods.

Some examples include:

- Outsourcing agreements for software development, consulting services, or information technology, for example, which have long-term payment terms after services have been rendered
- Substantial IT system enhancements were made over various fiscal timeframes.
- Services or inventory orders that have been bought long before the estimated time of need.

In these cases, AP is reported in two parts, namely current and non-current. The outstanding amount to be paid within the next year continues to be reported under current liabilities while the longer outstanding balances are carried down with other non-current liabilities. This offers greater accuracy in identifying the near-term actual AP commitments that are still not contrary to the matching principle of accounting.

Is Accounts Payable A Useful Metric?

Being a current liability arising from the day-to-day business operations, accounts payable can be very valuable in determining the financial health and solvency of a business. Lower AP as compared to inventory purchase implies that the payment cycle to the vendors is also short and better-working capital dynamics.

If AP is consistently held for relatively higher amounts or longer terms, it may indicate deteriorating bargaining power with suppliers or signs of emerging cash flow problems. Examining the AP over non-consecutive quarters reveals the progress or declining health of the business in handling costs and payments.

Accounts payable and other current liabilities that are still due must be controlled to check on working capital that is always positive so that enough funds to support business operations can be obtained.