2 min read
It’s always a good idea to brush up on your accounting basics, starting with the balance sheet. When you’re looking at the list of assets and liabilities, where does accounts payable fit in? Is accounts payable a liability or an asset in accounting? In this guide, we’ll discuss how to categorize these accounts and create accurate financial statements accordingly.
What is accounts payable?
When your business purchases goods or services on credit, you’ll record what’s owed in accounts payable. Essentially, accounts payable serves as a list of all debts currently owed by your business, which must be paid to outside parties. By contrast, accounts receivable shows all money owed to your business by customers.
Accounts payable only reflects purchases made on credit; if a purchase is made with cash, the transaction is complete without further debt owed.
Is accounts payable a liability or asset?
Both accounts payable and accounts receivable must be listed on the balance sheet. Accounts receivable are assets because they show the amount of money to be received. When a customer pays his invoice, the receivable amount is converted to cash – considered a business asset.
By contrast, accounts payable are liabilities because they show money that will leave business accounts when you pay your debts. In addition to the amount owed, your accounts will also show payment terms. For example, when you purchase equipment for your office on credit, the supplier’s invoice will show you a breakdown of all fees, product costs, and when payment is due. This should be recorded in accounts payable. The amount due will then show up as a liability because it’s money you must pay within the agreed-upon time frame.
Why is accounts payable a liability on the balance sheet?
To better understand why accounts payable is considered a liability, it helps to look at the breakdown of the balance sheet. A company’s balance sheet consists of three sections:
The purpose of the balance sheet is to give an overview of a company’s financial position. By showing all the money it owes and is owed as well as investments, you can see where you stand. For example, if liabilities outweigh assets, the company has less funding to work with.
So, why is accounts payable a liability on the balance sheet? The assets section shows you all the money you hold in terms of cash, cash equivalents, inventory, securities, and money due to come into your accounts. Accounts payable fits into none of these categories, because it shows you the debt you owe to third parties. For this reason, it falls under the liabilities section which includes debt, wages, payable dividends, and other outgoing expenses.
Is accounts payable a long-term liability?
When you look at a breakdown of the balance sheet, you’ll see current and long-term liabilities. Current liabilities are any debts due within 12 months. Accounts payable shows short-term debt owed to suppliers and creditors, making it a current rather than long-term liability. Additional examples of current liabilities include things like accrued expenses and notes payable. When debts persist for over one year, payables are moved to long-term liabilities and start to accrue interest.
How to manage accounts payable in accounting
Accurately tracking accounts payable helps your business take charge of cash flow and working capital. To manage your current liabilities more effectively, it’s worth automating your accounts payable and accounting processes. GoCardless integrates neatly with over 300 partners, including top software for a joined-up billing and accounting workflow. This helps you gain greater visibility over all your accounts, ensuring your financial statements reflect real-time transactions.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.