Is Accounts Payable A Liability Or Expense?

As for non-current liabilities accounts, accounts payable (AP) is one of the most frequently used accounts in the balance sheet. Yet, is it an account payable an asset, a liability, or an expense? It is critical to have a clear conception of the nature of AP to ensure the correct recognition of transactions and preparation of financial reports. Okay, let me just make some explanations here.

What is Accounts Payable?

Accounts payable is also known as trade payables, supplier’s payables, or creditors payables and it represents amounts due to creditors and suppliers. It indicates the short-term liabilities that ought to be settled in the following year or the operating cycle. Whenever a business buys merchandise or service for some other product or service on credit, then it has a liability known as Accounts Payable as it owes the supplier some money at a later date.

Common examples of accounts payable include:

- Goods that are bought for stock with the aim of resale and were acquired through the use of credit.
- Utility expenses owed
- Rent payments unpaid
- Supplier invoices due

The most common scenario is that as the amount of unpaid bills to suppliers and vendors increases, the balance in the AP account reflects the same. The accounts payable amount is a liability once the amount is paid to the suppliers, then this liability is reduced.

You probably know that Accounts Payable is a liability, but you might ask ‘Is accounts payable an asset?’
To answer this question, let us first know that accounts payable do not fall under the category of assets. Assets are on the balance sheet, and they refer to resources that a company controls and are capable of delivering future ordinary benefits. Some examples of assets are cash, Accounts Receivable, Inventory, Office Equipment, and Buildings.

Although Accounts payable means money that a company needs to pay to others, it cannot be categorized as company assets. Accounts payable is another head that is considered as the liability rather than the asset.

Is Accounts Payable a liability?

I can say that yes, accounts payable is, without a doubt, a liability. Formerly referred to as current liabilities, it is in the balance sheet. AP is the amount of money that is owed to the business in the short term and that should be paid within 12 months of its operating cycle.

This means that accounts payable have a credit balance since it is considered a liability. It appears on the liabilities side under the balance sheet equation:

Assets = Liabilities + Shareholder’s Equity

The amount of money owed to suppliers and vendors is expressed by the accounts payable balance. Each of the credit purchase bills keeps on mounting and accumulates over a period before they are paid hence the continuous rise of the AP liability.

Other short-term liabilities similar to accounts payable include:

- Notes payable
- Accrued expenses
- Unearned revenue
- Held for short-term purposes or due within the next year or operating cycle.

Is Accounts Payable an Expense?

Accounts payable is not an expense in its own right but rather a line item. Costs are therefore the kind of expenses that are incurred in the ordinary business of running a business. This includes, for instance, rent expenses, salary expenses, utilities expenses, and advertising expenses among others are some of the operating expenses that constantly erode profits.

When inventory, raw material, equipment, etc. are bought on credit as current assets, the first entry made does not record it as an expense but rather creates a liability called accounts payable. It has not made any expense that is recorded in the income statement.

The custom is a bit unique in the sense that the company only records the expense when it pays for the accounts payable and takes possession of the items that were purchased. When the payable is being paid, this line decreases while the expense account corresponding to it increases.

In conclusion, accounts payable can be described as a current liability account on the balance sheet at the time of being accrued, and becomes an expense account at the time of payment, reducing net income.

Recording Accounts Payable Transactions

Here is how a basic accounts payable transaction flows through the accounting records:

1. On the 15th of July, ABC company buys $5,000 worth of office supplies on credit terms that are given for 30 days from XYZ Supplies store.

2. XYZ Supplies delivers the stationery goods immediately and while making payment, they promise to make the invoice on the 15th of August.

3. When abc company receives the shipment it debits it as credit purchase in accounts payable liability and there is an increase in office supplies inventory asset. So far, no expense has been reported on the income statement.

4. On August 15 when abc pays off the $5,000 AP due, two entries are recorded:

a) The amount of office supplies depleted from the inventory asset is $5,000.

Office supplies expense on the income statement goes up by $5,000 in part b

The accounts payable account creates time for organizations to pay for services and merchandise that are useful in the business. If tracked properly, and payments are made on time, AP liability has a positive impact on cash flow and does not negatively affect suppliers. By observing the above guidelines, the subsequent recording of accounts payable transactions eases.

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