Short answer: accounts payable is a liability. If that’s all you needed to know, fair enough. Glad we could help! But if you’re asking this question, we’re going to guess that you’re likely new to the finance world, and a more thorough discussion of assets, liabilities, and accounts payable (A/P) might be useful.
After all, you might want to understand why A/P is considered a liability — beyond taking our word for it — and how that fact might impact how you handle and monitor these types of transactions.
Understanding assets and liabilities
What is an asset?
Put simply, an asset is anything that holds a financial value — e.g., cash, equipment, customer debts, property — that is owned by your business. And typically, assets are classified into one of four categories:
Current assets: Items that can be liquidated into cash within a short period of time (usually within 90 days but can be up to a year).
Fixed assets: Physical goods — like property or equipment — that aren’t routinely sold but can grow your business’s value.
Financial assets: Any bonds, stocks, securities, or other investments held by the company.
Intangible assets: Non-physical resources such as intellectual property, trademarks, patents, and cryptocurrencies.
What is a liability?
Conversely, liabilities are related to funds that are leaving your company — specifically outstanding debts you need to pay. And since A/P catalogs the money that your business owes to suppliers and vendors for credit-based purchases that weren’t made with cash up-front, accounts payable is listed as a liability.
Routinely these financial obligations are classified as either current liabilities that need to be paid in the next year or as long-term liabilities that are due after more than 12 months. Some common liabilities your business may hold include:
- Credit card debt
- Paid time off (PTO)
- Utility bills
Ledgers, credits, and debits
Both assets and liabilities will appear as line items within your general ledger as well as on your balance sheets. And any manipulation of those entries will occur as a debit (a decrease in total) or a credit (an increase in total) to the associated asset or liability account.
To further explain, within double-entry bookkeeping, any transaction made by a business will be recorded as two matching entries — a debit and a credit — on the balance sheet. For liabilities, any increase in the amount of a company’s total debt is reflected as a credit, and decreases are noted as debits. With assets, however, you would credit any decrease in the asset’s value and debit any increase.
So if you were to take out an $8,000 loan to fund the update of critical equipment, you would debit your cash fund for the loan total (because there was an increase in the overall value of this particular asset) while also crediting your A/P account for the same amount (because there was an increase in the amount of money owed by your business). And as your company pays off the loan, each payment would then be recorded as a credit to your cash account and a debit to your A/P.
How do you calculate accounts payable?
Determining your A/P total is relatively straightforward, following this general process:
- Identify and record your assets and liabilities
- Determine how much you owe each supplier and vendor
- Categorize these debts by their required payment date (typically within 30, 60, or 90 days)
- Record all relevant invoice details into a single record and add up the results
Often, this unified record will be in the form of an A/P subsidiary ledger, which documents the corresponding transaction history and amounts owed to each supplier and vendor. And the aggregate total of this subsidiary ledger — which will reflect your total accounts payable — will ideally match the line-item entry for A/P in your company’s general ledger. These two values should regularly be compared, with any variances quickly identified and resolved.
Accounts payable liabilities examples
Frank’s Haute Dogs is a growing food truck business that makes the city’s tastiest gourmet hot dogs, brats, and frankfurters. Last month, the company acquired $50,000 worth of meat from a nearby processor, $13,000 of condiments from a wholesaler, and $24,000 in buns from a local bakery.
All of these transactions were credit-based, with Frank’s Haute Dogs needing to pay off each shipment by the end of the following month. Within its general ledger, the business recorded an $87,000 debit to its Supplies line item — considered an asset — since the real-world value of its supply inventory increased with all of these purchases. Conversely, the organization also marked an $87,000 credit to its A/P line item, as these transactions reflect an increase in the company’s total liabilities.
While the total purchases are reflected in the general ledger, each transaction is recorded separately within the A/P subsidiary ledger. So while the meat and condiment totals are recorded on single lines since only one purchase was made from each provider, there are three entries for the local bakery since the $24,000 total reflected three separate bun shipments.
And in the next month, when Frank’s Haute Dogs pays off these outstanding invoices, the business will credit its Supplies line item and debit its A/P account for the payment totals.
Where Else Are You Gonna Go? — a local grocer in a small, isolated mountain town — purchased two new refrigerated display units (valued at $6,500) on credit to expand its frozen food section. The loan terms offered a very low-interest rate. Still, they required that the business fully pay off the debt within one year, meaning that this credit-based transaction would be considered a current liability.
For its accounting purposes, the grocer would record the acquisition of these two new fixed assets under the Equipment line item within its general ledger as a debit for the purchase cost. At the same time, the business would also note a corresponding $6,500 credit to the company’s A/P account since the transaction is credit-based. These two entries, in turn, will increase the company’s asset and liability balance by $6,500.
Common questions about A/P, liability, and accounting
Is accounts payable a debit or a credit?
Yes to both. Or, to clarify, within your bookkeeping efforts, A/P will be reflected by both credits and debits depending on where the outstanding debt is in the payment cycle. When a new accounts payable entry — such as a utility bill or invoice from a supplier — is received, it will appear as a credit to your A/P account. And when these bills are finally paid, the accounts payable entry will be debited for the appropriate amount.
Is accounts receivable (A/R) an asset or a liability?
As in most cases, accounts receivable operates as the mirror image of accounts payable, so A/R is considered an asset in your general ledger and balance sheets. While these funds that are owed to you have not yet been fully realized as revenue, they do represent contractually-obligated payments. Further, banks and lenders will often let you borrow against these owed funds since they reflect future income for the business.
Please see our article, “Is Accounts Receivable Considered an Asset or a Liability?” to learn more.
How do you record accounts payable on a balance sheet?
Accounts payable is classified as a current liability on a balance sheet. As previously mentioned, current liabilities are short-term debts that must be paid within the next 12 months.
What exactly is equity, and how does it factor into the discussion?
Equity — sometimes referred to as shareholder equity or owner equity — is another term related to the value of the business. However, in this case, a company’s equity is the leftover profit that would be available if the organization was completely liquidated and had all of its outstanding debts paid. When this liquidation actually happens in the real world, as a business shuts down, these remaining funds are then dispersed among the owners or shareholders of the company.
What is a liability?
Nobody is a fan of debt. And all of your organization’s liabilities, including accounts payable, reflect money that you owe to outside parties. In turn, you likely want to keep these balances at a minimum. But unless you switch to cash-only transactions — which would undermine your purchasing power and overall flexibility — these liabilities will be a constant for your business. Fortunately, there are measures that you can take to help keep your A/P liabilities in check.
- Focus on repayments: Perhaps the most straightforward method is to prioritize paying off any outstanding debts over reinvestment or growth plans. Not only will this reduce your A/P total, but it will also cut the amount of interest that you will pay for the related purchases.
- Reduce waste: By identifying and removing inefficiencies or bottlenecks within your business and its processes, you can lower the number of materials and labor — and associated costs — involved with your day-to-day operations.
- Leverage technology: With invoicing or A/P software in place, your account staff will be better organized and able to pay invoices and other debts on time, avoiding costly late fees.
- Negotiate for better terms: If you can make a credit-based purchase at a lower price or at a lower interest rate, you’ll be adding less liability to your business.
- Pay early: Many vendors offer early-payment discounts for their goods, which reduces the corresponding cost and liability for each purchase. And the quicker these debts can be cleared, the less time they’ll spend on your balance sheet, inflating your A/P total.
- Accelerate payments with automation: By minimizing the human element in your A/P practices, you can reduce the potential for fraud or errors, either of which can severely delay clearing an outstanding liability from your accounts. At the same time, an automated workflow keeps all payments moving through the process without any unnecessary waiting periods.
Automate your accounts payable processes with Invoiced
Keeping control of your liabilities and outstanding debts is critical for any business. And managing these efforts effectively doesn’t need to be a labor-intense chore. In fact, with the right processes and technologies in place, the whole endeavor can be rather simple and painless.
If you’d like to see what a streamlined, worry-free accounts payable process can look like, check out our A/P Automation solution. Schedule a demo today and take a giant step forward in reining in your overall liability.
More Helpful Accounts Payable Resources: