Is Accounts Payable A Liability?

Accounts payable is defined as one of the basic terms that are familiar to many and can be found on the balance sheets of many businesses. But is accounts payable actually considered a liability by the firm and hence should be removed from the working capital calculation? The short answer then is yes, accounts payable is generally categorized as a current liability on the balance sheet of any firm. Let me now provide you with a clearer understanding of what accounts payable entails and why it is deemed to belong to the liability section of the balance sheet.

What is Accounts Payable?

Accounts payable is a liability account that signifies the amount of balance that a business owes to its suppliers for products or services received on credit. Common examples of accounts payable expenses in a business include:

- Materials purchased from various suppliers or stockists and any raw materials that have been acquired.
- Assets that are used in that business enterprise for purposes of production, administration, or sales, bought on installment.
- Hunting – Advertising, legal and accounting fees, utilities, etc.
- Such other operating expenses that may not be paid for at this time

Credit purchases refer to a situation when a business acquires goods and services for cash but with an understanding that the payment will be made later. The balances outstanding during this corresponding delay constitute the accounts payable.

Accounts payable are recognized as accounts and often considered an asset for several reasons as discussed below:

On the balance sheet, liabilities are items that a business has to pay or has borrowed from other people or organizations. This includes accounts payable that are current liabilities due within a year, and installment, long-term notes. Accounts payable occurs when the goods and services received from the vendor are utilized, or used up in the company’s operations, incurring an obligation to pay the vendor in the future.

Here are some reasons why accounts payable meet the definition of a liability:

- It is a future duty to provide monetary consideration, a kind of debt
- A/P is constructed after the transactions have occurred and, therefore, future payment is inevitable.
- Failure to pay the debts due means that the business might be faced with legal repercussions or deteriorated business relations.
- The amount owed is undoubtedly measurable and often evidence of failure to pay is preserved.

Moreover classing A/P as a liability gives a correct view of money that has been spent or is owed and should be saved to clear the vendors. When the employees, managers, and investors are looking at the balance sheet or the income statement, each gets an accurate picture of the cash flow from the Accounts Payable line since this is realistic payables for the near future.

Liabilities and Equity -> Current Liabilities -> Accounts Payable on the Balance Sheet

Accounts payable also will be located on the balance sheet and in most cases it will be reported as the separate line in the current liabilities. It should be noted that all public companies are legally mandated to note accrued liabilities such as A/P in their balance sheets. The accounts payable listing provides the reader with the total dollar amount due by the company to other parties inclusive of vendors and suppliers as of a given date. Examining accounts payable in later time intervals indicates whether a firm is decreasing liabilities or increasing the amount of credit obtained from suppliers.

The only exception can be made in cases when the Accounting Company is really small or it is in the first stages of development and it applies the cash basis of accounting. They would not record accounts payable as assets in the balance sheet. However, for corporations that employ GAAP accrual accounting methods, accounts payable is one of the other short-term liabilities in operation. It is a key measure of financial status, liquidity, and overall cash flow management to monitor changes to it.