Is Accounts Payable Permanent Or Temporary?

Accounts payable is an obligation that plays a significant role in the accounting process as it defines the amount of money that a business owes to its suppliers and vendors. However, always ask whether accounts payable is a permanent or temporary account. That is the abstract Let’s take a closer look.

What is Accounts Payable?

Short-term obligations or credits known as accounts payable must be paid within the fiscal year of the business. Though it appears on a company's balance sheet as a liability, the fundamental idea is the same as that of an account receivable. The unpaid sums owing to suppliers, vendors, contractors, consultants, and all the others who have provided a product or service to the business comprise accounts payable.

Accounts payable occurs when a company acquires goods or services for a promise to pay the amount later. It shows the figure of the total overstated account that has not been cleared by cash payment but they represent what the business entity owes for the goods and services they have received. It is a current liability account that is cleared whenever the company pays its creditors.

Key Characteristics of Accounts Payable:

- It is indeed short-term, not long-term debts, that are crucial for the business.
- Accounts payable, or the money that is due to the suppliers and vendors
- Items consumed over a period and services availed on credit
- Is categorized in the current liabilities sub-section of the balance sheet.

Temporary vs Permanent Accounts

Both temporary and permanent accounts are the two broad categories of accounts. This classification depends on the frequency of closing of the account as well as whether the account balance is taken forward to the next financial year.

Temporary accounts are the accounts that are used to record activities that took place in the current accounting year. They are closed out at the end of the 12-month fiscal period. Some examples of temporary accounts include revenues, expenses, and withdrawal accounts.

While on the other hand, we have permanent accounts which are kept open from one year to the other. It does not get closed out annually The balances of their accounts do not get closed out annually. The assets, liabilities, and equity accounts commonly remain permanent accounts since they capture the residual value of the business’ economic resources continuously.

Whether Accounts Payable is Classified as Temporary or Permanent Account?

Accounts payable is considered a permanent account because:

1. It is one of the accounts that is reported on the company’s balance sheet with the classification of a direct or indirect financial liability.
2. AP refers to commitments that might take more than a year to be paid and therefore they are liabilities that occur in the subsequent financial period.
3. The indicated balance of account also persists from the end of one fiscal year to another.

For example, if a business organization bought supplies from a vendor in December but on credit, whereby the payment is due after 60 days, the business would account for that in its January balance sheet after closing the books for the new year. The payment impacts the income statement for the year in which the costs are incurred and does not eliminate the liability account at the end of the year.

Concisely, the balance of AP, though individual AP transactions may take weeks or months to get finalized with the suppliers, remains an ongoing balance from one accounting period to the next If the business continues to receive goods/services on credit. AP is hence one of the recurring accounts that the company incurs in its operations and which helps finance its short-term working capital requirements.

However, Accounts Payable is listed in the Current Liability section of a balance sheet – not under other temporary accounts, such as revenues or expenses. While new purchases are made through the contra account – Accounts Payable Payments, it is only closed to the income statement yearly.

In summary, Accounts Payable meets the definition of a permanent account:

✔️ Represents the company’s liabilities in the balance sheet.

✔️ A balance sheet asset, liability, or equity that is not eliminated in a consolidation of financial statements between related businesses.

✔️ Not properly closed off at the end of each period or accounting year

Thus, ‘accounts payable’, which forms part of short-term liabilities and refers to the money owed to the supplier or the vendors, is called a permanent account in the books of account. That way, categorization as a permanent account enables the AP balance to remain constant on the bookkeeping records rather than having to restart from zero at the beginning of consecutive reporting years.