Are Accounts Payable an Expense?

Accounts payable (AP) are often mistaken for a company’s core operational expenses. However, they are presented on the company’s balance sheet and the expenses that they represent are on the income statement.

Key Takeaways

• Accounts payable is an account in a company’s general ledger
• AP sums show a company’s short-term debt to its creditors or suppliers
• Accounts payable are liabilities on the balance sheet because they are yet to be paid
• Companies analyze AP to understand its working capital for the best potential use

What Are Accounts Payable (AP)?

Accounts payable are a liability. More specifically, they are considered short-term liabilities or debts owed to suppliers and/or creditors. Companies often owe these debts for goods and services delivered but not yet paid.

AP are obligations that must be paid within a certain period. Although there is no legal or prescribed time limit, money owed must be paid within a short time—usually within 30, 45, or 60 days. Some companies may offer newer customers a shorter time to pay (or ask for immediate payment) for goods and services while others may offer better customers more time to pay.

Accounts payable appear on a company’s balance sheet under the current liabilities section. You can determine how well a company is positioned by analyzing the accounts payable turnover ratio. A high AP turnover ratio means a company earns enough revenue to pay off its short-term debt.

Liability Account vs. Expense Account

Liabilities are displayed on a company’s balance sheet, which provides a snapshot of its financial standing. Liabilities are traditionally recorded in the AP sub-ledger at the time an invoice is vouched for payment. Vouched simply means an invoice is approved for payment and has been recorded in the general ledger as an outstanding liability, where the payment transaction is still in the pipeline. Such payables are often referred to as trade payables.

Liability accounts include interest owed on loans from creditors—known as interest payable, as well as any tax obligations accumulated by a company, which are known as taxes payable. These are not part of accounts payable.

Debt owed to creditors typically must be paid within a short time frame—around 30 days or less. These payments don’t involve a promissory note. For example, mortgage obligations aren’t grouped in with AP because they come with a promissory note attached. This is why mortgage obligations fall under notes payable—none of these are classed as accounts payable.

Expenses, on the other hand, are displayed on a company’s income statement to convey net income for a given period. An example of an expense transaction would be any cost incurred while a salesperson is attempting to generate revenue on a networking trip. These expenses may include lodging, client dinners, car rentals, gasoline, office supplies, and multimedia materials used for presentations.

The best way to distinguish between liabilities and expenses is by analyzing cash flow. Liabilities are obligations that have yet to be paid. Expenses are costs that have been incurred to generate revenue, but may or may not have been paid.

Logistical Tracking Measures

Keeping track of AP can be a complex and onerous task. For this reason, companies typically employ bookkeepers and accountants who often utilize advanced accounting software to monitor invoices and the flow of outgoing money.

These tracking responsibilities become exponentially more complicated with large firms that have multiple business lines, and with large product manufacturers that produce numerous stock-keeping units (SKUs).

For such entities, bookkeeping personnel are increasingly relying on the use of specialized accounts payable automation solutions (often referred to as ePayables”) to simplify processes by automating the paper and manual elements associated with coordinating an organization’s invoices.

How Do You Calculate a Company’s Accounts Payable Turnover Ratio?

Accounts payable turnover ratio is a financial metric that indicates how quickly a company pays its suppliers and creditors. To calculate this ratio, divide the total purchases by the average accounts payable. You can get the figure for the average accounts payable by adding the beginning AP figure and the ending AP figure and dividing the result by 2. Put simply, you can use this formula:

• Total Purchases ÷ ((Beginning AP + Ending AP) ÷ 2)

You can find the sales and AP figures (both the beginning and end) on a company’s balance sheet.

What Are Some Types of Accounts Payable?

The term accounts payable refers to money that an entity owes to another for unpaid goods and services that were already delivered. Accounts payable include trade payables, which are debts owed to companies for inventory-related goods, and expense payables, which are debts owed for goods and services that are purchased and expensed. Examples of accounts payable include invoices, payments to contractors, and legal bills.

What’s the Difference Between Accounts Payable and Accounts Receivable?

Accounts payable are short-term liabilities that a company owes to another company or creditor. These figures can be found on a company’s balance sheet under the current liabilities section. The term accounts receivable, on the other hand, refers to money owed to a company for unpaid goods and services that were already delivered. The receiving company records AR under the current assets section of its balance sheet.

The Bottom Line

Accounts payable are short-term obligations that companies must pay for unpaid goods and services delivered. These figures are liabilities, which is why they appear on the balance sheet under current liabilities, unlike expenses. These figures are commonly found on a company’s income statement.