Is Accounts Payable An Asset Or Equity?

The question under consideration is whether, based on the definition of accounts payable, it can be considered as an asset or equity in a company’s balance sheet. Asking Where It Fits in the Balance Sheet

It has been a common dilemma for many small business owners and even accounting students, in particular, regarding the classification of accounts payable as an asset or as equity on the balance sheet. Accounts payable refers to the short-term liabilities because of the products and services received from the vendors, suppliers, contractors, and others which are usually paid for at a later date. But is it an asset or other what?

What Are Assets?

Assets contain identifiable what that a company has or to which it has the right to. Some examples of common business assets include:

- Every business will require cash at one or the other in the course of the business, so, cash and cash equivalents.
- Accounts receivable
- Inventory and supplies
- Prepaid expenses
- Immovable property, buildings, and equipment
- Furniture and fixtures
- Vehicles
- Such as computers, software, etc.

In the balance sheet, the assets are usually arranged with a view to their liquidity which refers to the extent to which the assets can be converted into cash. Current assets are the ones that can be converted to cash and made available for use within one year while fixed assets are the ones that will take much more than a year.

What Is Equity?

Equity is the ownership claims or residual interest in terms of the corporate assets minus liabilities. It also has another name, which is shareholders equity when talking about companies. Equity comes from two primary sources:

1. Paid-in capital - The additional resources that owners/shareholders provide to the entity through the purchase of shares of stocks; capital subscriptions

2. Retained earnings – Cumulative net income earned by the company throughout its existence from the date of incorporation up to the balance sheet date less any dividends declared on the retained earnings.

In combination, they equal a business’s net worth or book value. Equity would have to be indicated in the assets and liabilities section of the balance sheet, but under the equity column.

Accounts Payable Definition and Characteristics

Having looked at what assets and equity entails, what place does Accounts payable have? Accounts payable are also recognized in the current liability of the balance sheet.

Accounts payable is defined as the amounts of money due and payable in the short-term by the business to its suppliers of products and services, following receipt of an invoice.

Key characteristics of accounts payable:

- They are recognized as an obligation that earns the business an expense within one year or the business cycle. Thus, it is deemed as a near-term as opposed to a long-term one.

- AP has no collateral or interest to be paid to anyone or any organization. Purchasing departments receive credit granting payment terms such as net 30 or net 60 days.

- Credit balances are based on credit purchases in terms of inventory, advertising, transportation, utilities, and others; and if you transgress the normal business credit terms, the costs accrued may be accompanied by interest and penalties for delayed payment.

Why AP Is Considered A Liability And Not An Asset

Suppliers are offering goods and services on credit which is similar to providing a form of loan or financing to the business. Hence, the business borrows the amount and there is an understanding that the money will be repaid in the future but without any contractual note. This means that it creates a liability that the company has to pay, hence making accounts payable to be a liability as opposed to an asset.

In particular, accounts payable is recognized as the current liability on the balance sheet of the firm. Other common examples of current liabilities include:

- Accounts payable
- Accrued expenses payable
- Income taxes payable
- The long-term debt is the amount of money that will be paid back over an extended time and the current portion of this amount is part of the debt that will be paid within one fiscal year.
- Payroll liabilities
- Sales tax payable
- Dividends payable
- Unearned revenue

Usually, current liabilities are settled using current assets within the coming year or one operating cycle of the business.

This is because if an accounts payable balance remains unpaid beyond the 1-year expected payment period, it would be moved to the long-term liabilities section of the balance sheet.

Why Accounts Payable Does not fall under Equity.

Equity is therefore a balance sheet measure that reflects the ownership interest in a business after creditors have been paid. The numerator of this equation, that is accounts payable, does not have any relation with ownership interest. However, it is the representation of outside parties’ demand for the company’s resources.

Further, paid-in capital and retained earnings are other examples of equity accounts that are based on shareholders’ funds that result from investments or profits earned from business operations over time. Accounts payable only arises from the AC of unpaid bills due to suppliers and vendors.

In Summary

- Assets are economic resources while liabilities are those owned by a business.
- Specifically, accounts payable relates to current liabilities since it comprise short-term financial debts and other responsibilities.
- Equity can be defined as the net ownership or asset claims that owners, as well as shareholders, have on the company.
- Accounts payable is something opposite to property, inventory, or cash in the sense that it is not an asset of the business.
- Accounts payable on the other hand demonstrate the money that is owed from outside creditors from unpaid bills

Well, in short, accounts payable perfectly match to be reported in current liability on the balance sheet, not on any asset section or within the shareholders’ equity. For appropriate record-keeping and evaluation, it is crucial to categorize it correctly as a liability account and not as an asset or equity account.

Contact us here for Accounting services now!