What Are Accounts Payable?
Accounts payable is the amount of short-term debt or money owed to suppliers and creditors by a company. Accounts payable are short-term credit obligations purchased by a company for products and services from their supplier.
Accounts payable have payment terms associated with them. For example, the terms could stipulate that payment is due to the supplier in 30 days or 90 days. The payable is in default if the company does not pay the payable within the terms outlined by the supplier or creditor. Accounts payable is listed on a company's balance sheet.
Accounts payable is a liability since it's money owed to creditors and is listed under current liabilities on the balance sheet. Current liabilities are short-term liabilities of a company, typically less than 90 days.
- Accounts payable include short-term debt owed to suppliers.
- They appear as current liabilities on the balance sheet.
- Accounts payable are the opposite of accounts receivable, which are current assets that include money owed to the company.
Accounts Payable vs. Accounts Receivable
Accounts payable are not to be confused with accounts receivable. Accounts receivables are money owed to the company from its customers. As a result, accounts receivable are assets since eventually, they will be converted to cash when the customer pays the company in exchange for the goods or services provided.
Revenue is only increased when receivables are converted into cash inflows through the collection. Revenue represents the total income of a company before deducting expenses. Companies looking to increase profits want to increase their receivables by selling their goods or services. Typically, companies practice accrual-based accounting, wherein they add the balance of accounts receivable to total revenue when building the balance sheet, even if the cash hasn't been collected yet.
Accounts receivable are similar to accounts payable in that they both offer terms which might be 30, 60, or 90 days. However, with receivables, the company will be paid by their customers, whereas accounts payables represent money owed by the company to its creditors or suppliers.
Composition of a Company's Balance Sheet
A balance sheet reports a company's assets, liabilities, and shareholders' equity for a specific period. The balance sheet shows what a company owns and owes, as well as the amount invested by shareholders.
The balance sheet is broken down into 3 major categories:
- Debt including long-term debt
- Rent and utilities
- Dividends payable
3. Shareholders' equity:
- Shareholders' equity is the amount that would be returned to shareholders if all the company's assets were liquidated and all its debts repaid.
- Shareholders' equity is calculated by taking a company's total assets and subtracting its total liabilities.
To see how accounts payable is listed on the balance sheet, below is an example of Apple Inc.'s balance sheet, as of the end of their fiscal year for 2017, from their annual 10K statement.
- Current liabilities are highlighted in red.
- Accounts payable for Apple was approximately $49 billion (highlighted in blue).
- Accounts payable was a significant portion of Apple's total current liabilities of $100.8 billion (highlighted in pink).
- We can see that total current liabilities ultimately filters down into total liabilities of $241 billion (highlighted in yellow).
Other current liabilities can include notes payable and accrued expenses. Current liabilities are differentiated from long-term liabilities because current liabilities are short-term obligations that are typically due in 12 months or less.
The Bottom Line
Accounts payable is considered a current liability, not an asset, on the balance sheet. Individual transactions should be kept in the accounts payable subsidiary ledger.
Effective and efficient treatment of accounts payable impacts a company's cash flow, credit rating, borrowing costs, and attractiveness to investors.
Companies must maintain the timeliness and accuracy of their accounts payable process. Delayed accounts payable recording can under-represent the total liabilities. This has the effect of overstating net income in financial statements.