How Accounts Payable Assets Are Recorded on a Balance Sheet

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When it comes to building out a balance sheet, an organization’s accounts payable come into play. As you work through a balance sheet, you’ll need to determine whether accounts payable are an asset or not. Generally, accounts payable aren’t an asset. Instead, they are a short-term liability.

What Are Accounts Payable?

Accounts payable represent short-term debts and money owed to a company’s vendors and creditors. In general, accounts payable are short-term obligations that must be paid in the relatively near future.

Essentially, accounts payable represent a short-term IOU issued by a vendor to a company accepting goods or services without forking over cash immediately.

How Do Accounts Payable Appear on the Balance Sheet

A company’s balance sheet is generally broken down into three major categories, including:

• Assets: Includes cash, cash equivalents, marketable securities, accounts receivable, inventory, property, equipment, tools and more.
• Liabilities: These include accounts payable, other debts, rent, utilities, wages, taxes, insurance, bills and more.
• Shareholder equity: Accounted for on the balance sheet by subtracting the company’s total liabilities from its total assets.

Accounts payable appear on the balance sheet as current liabilities. Accounts payable are considered a liability because they represent a purchase made on credit instead of cash. Although the purchase may be complete, the company must still pay the supplier or creditor to resolve the accounts payable.

But companies generally make a double entry for accounts payable. In addition to including accounts payable on the liabilities side of the balance sheet, they often include the assets purchased through the accounts payable on the assets side of the balance sheet.

For example, the accounts payable amount of $500 for a tool purchase belongs on the liabilities side of the balance sheet. But the value of the tool itself belongs on the assets side of the balance sheet.

Accounts Payable vs. Accounts Receivable

At first glance, accounts payable and accounts receivable might seem similar. But it’s important not to confuse these two separate issues.

As mentioned, accounts payable are considered a liability. In contrast, accounts receivable are considered an asset. That’s because accounts receivable represent funds other companies owe the organization.

Example of Accounts Payable

Suppose a souvenir company purchases $1,000 worth of t-shirts from a supplier. The supplier allows the purchase to be made on credit or on account, meaning no cash is exchanged at the time of the transaction.

In this case, $1,000 is recorded in accounts payable as a liability on the balance sheet. Once the vendor is paid for the t-shirts, the accounts payable entry is removed from the balance sheet.

Importance of Accounts Payable

Accounts payable represent short-term debt obligations. While terms can vary, accounts payable typically need to be paid for within 30 days. For companies, it’s important to keep tabs on the repayment strategy, especially with such a short repayment window. Without effective cash flow management, accounts payable can become overdue.

In many large organizations, the accounts payable team is very important. Here’s a look at some of the reasons effective accounts payable management matters:

• Accounts payable access simplifies business processes. A company often needs to procure goods and services from vendors. If the vendor allows the company to accept the good or service without providing cash upfront, the company can keep business processes moving without delay.
• Build relationships with suppliers. If you manage your accounts payable well, the vendors will always be paid on time. When suppliers are paid on time, working relationships can improve and potentially lead to discounts or more favorable repayment terms in the future.
• Cash flow management. Accounts payable gives companies some wiggle room in their cash flow management. You won’t necessarily need to have the funds to pay for the goods and services you need on hand. Instead, you can accept the goods and handle the repayment in the coming weeks.
• Cash management forecast. If you keep track of your accounts payable from year to year, you’ll likely notice patterns of when your business consumes more capital. You can use this information to create accurate cash forecasts and optimize working capital in future years.
• Tracking prevents mistakes. With careful tracking of your accounts payable, it’s easier to prevent mistakes and stop fraud in its tracks.

Poor accounts payable management can lead to bigger business problems.

For example, if word gets around that a company doesn’t resolve its accounts payable in a timely manner, then your preferred vendors and suppliers may no longer extend short-term credit. Instead, suppliers might require you to pay for the goods and services before you receive them or as you receive them.

Depending on the nature of your business, lacking access to short-term credit in the form of accounts payable could be a real problem.

How To Record Accounts Payable

If you want to report an accounts payable in your balance sheet, use these two steps as a guide:

• Receive the bill. After accepting goods or services from a vendor, you’ll likely receive a bill. Within the bill, you’ll see exactly how much you owe to the vendor and the repayment timeline.
• Balance your entry. If you made a purchase of an asset using an accounts payable, you can balance your accounts payable credit against the newfound asset. For example, if you purchased a $500 tool with a credit from a vendor, you can include that tool as an asset in your balance sheet. In the liabilities section of your balance sheet, you can add the accounts payable bill of $500.

Accounts Payable vs. Other Liabilities

Accounts payable aren’t the only type of liability you can have on your balance sheet. The major difference between accounts payable and other types of liabilities is the expected repayment timeline. Generally, accounts payable are expected to be paid for in the short term. In contrast, other liabilities might include ongoing expenses or long-term debts.

Here’s how accounts payable stack up against other common types of liabilities:

• Long-term debt: If you financed a property for business use with a 15-year mortgage, that’s a liability. But the long timeline and ongoing nature distinguish this type of debt from short-term accounts payables.
• Accrued expenses: These expenses build up over time and must be paid for when the bill is due. For example, the utilities and wages required to run your business fall under accused expenses.

Final Take

Accounts payable represent liabilities on your balance sheet. As a short-term debt obligation, it’s important to keep track of repayment windows tied to accounts payable.

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