What Are Accounts Payable?
Strictly defined, the business term "accounts payable" refers to a liability, where a company owes money to one or more creditors. Some people mistakenly believe accounts payable refers to the routine expenses of a company’s core operations, however that is an incorrect interpretation of the term.
The balance of a company’s accounts payable is a common statistical data point included in the expense report one studies when reviewing a company's general financial statements. Therefore, accounts payable is a critical metric to analyze when a company is up for consideration for possible merger or acquisition activity. A company’s expenses are also included in a company’s financial statements. And while accounts payable and expenses are certainly related to one another, they are essentially independent concepts.
- Accounts payable is an account within the general ledger that represents a company's obligation to pay off a short-term debt to its creditors or suppliers.
- Accounts payable refers to liabilities, which are obligations that have yet to be paid, and expenses or obligations that have already been paid in an effort to generate revenue.
- Accounts payable is a critical metric to analyze when a company is up for consideration for possible merger or acquisition activity.
Liability Account vs. Expense Account
The best way to distinguish between liabilities and expenses is by analyzing past versus future actions. Liabilities are obligations that have yet to be paid, expenses are obligations that have already been paid in an effort to generate revenue.
Liabilities are displayed on a company’s balance sheet, which shows a clear and easy-to-understand snapshot of a company's financial standing for a specific time frame. Liabilities are traditionally recorded in the “accounts payable” 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.”
Debt owed to creditors typically must be paid within a short time frame, around 30 days or less. Most importantly, these payments do not involve a promissory note. For example, mortgage obligations would not be grouped in with accounts payable because they do in fact come with a promissory note attached. For this reason, mortgage obligations fall under “notes payable,” which is classified as a separate expenditure category.
“Expenses” are displayed on a company’s income statement, which itemizes revenues and expenses, 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.
Logistical Tracking Measures
Not surprisingly, keeping track of accounts payable 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 manufactures 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.