A:

Accounts payable is a liability, not an expense. The two represent related but ultimately different concepts. The balance of accounts payable is commonly included in total expenses when reviewing a company's financial statements. The best way to understand how to distinguish between liabilities and expenses is by analyzing past versus future actions; liabilities are those obligations that are yet unpaid, while expenses are obligations that have already been paid in an effort to generate revenue.

Liability Account Vs. Expense Account

Liability and expense accounts both appear on financial statements. Liabilities are covered on the balance sheet, which shows a snapshot of a company's financial standing for a specific date. Expenses show up on the income statement. The income statement itemizes revenues and expenses to show net income for a period of time.

An example of an expense transaction would be any cost that might be incurred while a salesperson is trying to bring in revenue. Lodging, client dinners, transportation and materials for presentations are all added to the expense account.

Liability accounts are any costs incurred that haven't yet been paid. These include interest owed on loans from creditors (interest payable) and taxes that have built up that the company expects to have to pay (taxes payable).

Accounts payable involves any money owed to creditors that will come due in a short period of time – usually less than 30 days – that doesn't involve a promissory note. A mortgage obligation wouldn't be added to accounts payable because it came with a promissory note; mortgage obligations fall under notes payable.

RELATED FAQS
  1. How are accounts payable listed on a company's balance sheet?

    Find out how accounts payable is listed on a company's balance sheet, why it is considered a current liability, and how it ... Read Answer >>
  2. Are accounts payable a liability?

    Take an in-depth look at accounts payable, or trade payable, an important current liability account listed on a company's ... Read Answer >>
  3. Are accounts payable an asset?

    Find out why the general ledger accounts payable is considered to be a current liability, not a current asset, and how it ... Read Answer >>
  4. What's the difference between accrued expenses and accounts payable?

    Learn how companies use accrued expenses and accounts payable on their balance sheet and the difference between the two liabilities. Read Answer >>
  5. What is the difference between an accrual and an account payable?

    Understand the difference between an accrual and an account payable. Learn how an accrual and an account payable affect a ... Read Answer >>
  6. What is the difference between accrual accounting and accounts payable?

    Understand the difference between accrual accounting, an accounting method, and accounts payable, which is a ledger entry ... Read Answer >>
Related Articles
  1. Investing

    Calculating the Accounts Payable Turnover Ratio

    The accounts payable turnover ratio measures the speed at which a company pays its suppliers.
  2. Investing

    Understanding Total Liabilities

    Total liabilities are the combined debts an individual or company owes.
  3. Investing

    Explaining Noncurrent Liabilities

    Noncurrent liabilities are financial obligations a company owes a year or more into the future.
  4. Investing

    Reading the Balance Sheet

    Learn about the components of the statement of financial position and how they relate to each other.
  5. Investing

    Explaining Accrued Liability

    Accrued liability is an accounting term for an expense a business has incurred but has yet to pay.
  6. Investing

    Breaking Down The Balance Sheet

    Knowing what the company's financial statements mean will help you to analyze your investments.
  7. Taxes

    What is a Tax Liability?

    Tax liability is the amount of money a person or entity owes to the government as the result of a taxable event.
RELATED TERMS
  1. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to ...
  2. Current Liabilities

    A company's debts or obligations that are due within one year. ...
  3. Liability

    Liabilities are defined as a company's legal debts or obligations ...
  4. Accounts Payable Turnover Ratio

    A short-term liquidity measure used to quantify the rate at which ...
  5. Other Current Liabilities

    A balance sheet entry used by companies to group together current ...
  6. Income Tax Payable

    A type of account in the current liabilities section of a company's ...
Hot Definitions
  1. Blue Chip

    A blue chip is a nationally recognized, well-established, and financially sound company.
  2. Payback Period

    The length of time required to recover the cost of an investment. The payback period of a given investment or project is ...
  3. Collateral Value

    The estimated fair market value of an asset that is being used as loan collateral. Collateral value is determined by appraisal ...
  4. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  5. Current Account

    The difference between a nation’s savings and its investment. The current account is defined as the sum of goods and services ...
  6. Liability

    Liabilities are defined as a company's legal debts or obligations that arise during the course of business operations.
Trading Center