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Accounts payable: asset or liability?

Is accounts payable an asset or a liability? Learn what assets and liabilities are and find out exactly how accounts payable shows up on the balance sheet.

Gilad Idisis
Published at | Updated:
Two business partners managing the books at their office.

Take a look at any balance sheet and two things stand out: assets and liabilities. 

Perhaps you’re just starting out with bookkeeping for your business. Or you may be looking for a new tool to tackle your accounting operations. Either way, there is something you need to understand: is accounts payable a liability or an asset?

Short answer, accounts payable go down as liabilities on your balance sheet.

If you’re interested in the longer answer, then read on. To start with, let’s break down the relevant bookkeeping terms that are involved:

  • Accounts payable
  • Assets
  • Liabilities

What’s accounts payable?

Accounts payable (also knows as AP) is the total amount of short-term debt your business owes to creditors and suppliers for services or goods you bought but have not paid for yet. 

Businesses typically purchase goods from their suppliers on credit, meaning the invoice for the goods is due at an agreed-upon time, whether 30 days or 60 days from receipt of the goods. Until the invoice is paid, the debt owed to the supplier comes under the umbrella of accounts payable.

If goods or services are purchased with cash, there is no short-term debt, meaning it’s not included under accounts payable.

When it comes to accounts payable vs expenses, expenses have already been paid for and are recorded as paid in your accounting books. There is no outstanding debt, and therefore they are not considered accounts payable.  

One last thing: what is the difference between accounts payable and accounts receivable you ask?

They are essentially flip sides of the same coin. Accounts payable is the bills (ie. debt) owed by a business within an accounting period. Accounts receivable is the money owed to the business by its customers, in exchange for any goods or services provided.

Real-world accounts payable example

Let’s say a bakery buys $4,000 worth of baking ingredients, which will be used over the next month. Payment is due to the supplier within 30 days from the invoice date. This amount is listed under accounts payable in the bakery’s bookkeeping records until it is paid. 

The bakery will have other accounts payable items listed. For example, a repair bill for an oven technician or a new staff uniform.

For small businesses, keeping your AP organized will help ensure a healthy cash flow and maintain your relationships with vendors. Check out these accounts payable tips for small businesses to improve your accounts payable processes.

Balance sheet presentation of accounts payable

What does accounts payable look like on a balance sheet? You can find it as a line item under the “Current Liabilities” section of a standard balance sheet.

If you use an accounts payable software that syncs with your accounting software, you can automatically incorporate your accounts payable data as a record in your balance sheet along with all your other assets and liabilities.

Sample balance sheet | Accounts payable

How do you record accounts payable transactions?

There are several steps involved in the process of recording accounts payable transactions:

  1. Invoice is received: The invoice from the supplier or vendor is received after the goods or services have been provided. 
  2. Invoice is approved: You or your bookkeeper check the invoice to make sure it is correct. If so, the invoice is approved.
  3. Invoice is recorded: The details of the approved invoice are recorded in the accounting software, including date, amount, and details of the goods or service received. This information is also recorded in the general ledger, where it is noted under accounts payable.
  4. Invoice is paid: The payment is made for the invoice, preferably within the due date. The amount is removed from the accounts payable record, and becomes an expense.

What are assets?

In trying to understand what is accounts payable, assets or liabilities, it is important to understand what each term means.

Let’s start with assets. Assets are anything that has monetary value in your business. That includes anything that the business can financially claim.

For example, assets can be:

  • Cash or cash equivalents
  • Equipment
  • Supplies
  • Property (ie. a shop premises or office that is owned by the business)
  • All amounts in accounts receivable: payments for unpaid invoices owed to the business are assets.

There are several types of assets, which we’ll explore below:

Current assets

Current assets are assets that are used within a period of up to one year. These are short-term assets that are necessary for the day-to-day operations of a business. For example, inventory, prepaid expenses, and accounts receivable (money owed by customers who have been invoiced) are all short-term or current assets.

Fixed Assets

On the other hand, fixed assets are assets that have a longer-term lifespan of over a year. Fixed assets include owned property, equipment, machinery, and vehicles that are used to run the business and produce the goods or service that the business provides.

Other Types of Assets

There are other kinds of assets that may be relevant to your accounting operations. 

Financial assets, for example, include cash, stocks, bonds, mutual funds, and other liquid assets. In contrast to assets like property or equipment, financial assets may not necessarily have a physical form. The value of a financial asset lies in the ownership claim or contractual right to a future payment from the entity.

Intangible assets are assets that do not have a physical form, yet add value to a business. Examples of intangible assets include a brand, intellectual property, and even goodwill among the consumer market.

Intangible assets are considered long-term assets, whose value ideally increases over time. Intangible assets can become tangible if they are bound by a contract. For example, while a patent is an intangible asset, a contract providing legal permission to use a patent is a tangible asset.

Difference between assets and liabilities in accounts payable

What are liabilities?

Liabilities are the exact opposite of assets. Liabilities are any money that a business owes or has borrowed. In other words, liabilities are a business’s financial obligations or unpaid debts. 

For instance, the bakery mentioned earlier took out a small business loan to purchase new custom shelving for the store. The loan is a liability and will remain so until it is fully paid off. 

More examples of liabilities include:

  • Accounts payable (vendor bills)
  • Mortgages
  • Loans
  • Unpaid expenses (accrued expenses)
  • Wages
  • Interest payable
  • Warranties

Let’s explore some of the key types of liabilities on a typical accounting balance sheet:

Current liabilities

Current liabilities are short-term liabilities that are due for payment within one year. The time frame for current liabilities may be shorter than that, depending on the business’s operating cycle. Accounts payable, which includes any short-term debt or bills, is one of the items under the “Current Liabilities” section of a balance sheet.

Non-current liabilities

Non-current liabilities are long-term debts recorded on a balance sheet that are not due for payment in the coming year. For this reason, they are also called “long-term liabilities”. 

Examples of non-current liabilities include long-term borrowings or loans, long-term leases, deferred taxes, and liabilities on derivatives, to name a few.

Contingent liabilities

Contingent liabilities are a bit more complex. They refer to expenses that may occur in the future or as a result of an unforeseen event. For example, having to pay out a product warranty is a contingent liability, as it was not certain that the payment would arise. Another example of a contingent liability is a pending lawsuit that may require a business to pay out a claimant when the case is concluded.

How to Keep AP liabilities in check

For small to medium-sized businesses (SMB), keeping accounts payable liabilities under control is key to maintaining financial stability and smooth operations. Here are several ways that SMBs can better manage their AP:

  • Create clear payment policies: With clear payment policies and procedures in place, you, your team, and your vendors can stay aligned and avoid misunderstandings.
  • Prioritize urgent payments: Build a payment schedule that ensures critical suppliers are paid on time to avoid disrupting your business operations. 
  • Focus on repayments: Staying up-to-date with loan repayments is essential to avoid penalties and to maintain a good reputation among lenders.
  • Keep an eye on cash flow: Plan your payment schedule according to cash inflows to be sure that sufficient funds are available. You can also use Melio to pay by card and defer payments to the end of the billing cycle, allowing you to hold onto cash longer. Monitor your cash flow and if needed, adjust the payment schedule to accommodate it.
  • Negotiate payment terms: Where possible, negotiate longer payment terms with suppliers, or even discounts for early payments. This can provide a solid boost to cash flow.
  • Build strong vendor relationships: This is essential to achieve favorable payment terms that may allow for flexibility when needed. 

Use a bookkeeping tool with automation features: Bill pay platforms like Melio enable businesses to automate invoice processing, set up approval workflows, and choose a payment method that benefits your business beads, making it much easier to stay on top of your AP.

So, is accounts payable an asset or a liability?

Now to the original question: is accounts payable a liability or an asset?

If you’ve read this far, you already know: it’s a liability.

Let’s return to the bakery example. The business purchased $4000 worth of ingredients that will be used in the next month or so. The payment terms are 30 days from the date on the invoice. This means that from the date of the invoice, until the bill is paid, the $4000 amount will appear in the books as accounts payable.

And, of course, accounts payable come under the “Liabilities” section of the balance sheet.

For those wondering is accounts payable a long-term asset let us clarify. AP is a liability, not an asset, and it is a short-term liability. This means that accounts payable only includes payments that are due in the short term, within the coming year or operating cycle.

Is accounts receivable an asset or liability?

Conversely, accounts receivable is the monies owed to a business for any goods or services provided. It includes all unpaid invoices or short-term credit issued to customers. It is money that will come into the business in the near future. This means that accounts receivable is an asset, listed on the Assets side of the accounting balance sheet, and more specifically, under “Current Assets”.

How to effortlessly manage your accounts payable

Any business, from small to large, will have a steady flow of bills and invoices to pay. Being up to date and accurate with accounts payable is a key element of proper accounting, critical for ensuring cash flow, avoiding late payments, and maintaining good relationships with vendors and suppliers.

That’s why you need to choose the right accounts payable tool to help you.

Melio, for example, is an online platform for businesses to track and record accounts payable, and to pay vendors—all from within one easy tool. Automate your payment schedule so you never miss a payment, and pay vendors with bank transfers or by credit card, even vendors who don’t accept cards.* 

Melio syncs with QuickBooks Online and Xero. This ensures that accounts payable data seamlessly flows from Melio to your balance sheet, with no double effort or time spent on data entry.

Yes, accounts payable is a technical “liability” on your balance sheet, but it doesn’t have to be a burden on your business operations. Set up your Melio account to make your accounts payable workflow as efficient and smooth as can be.

*This blog post is intended for informational purposes only and is not intended as financial advice.
**Melio does not provide legal, tax or accounting advice, and you should consult with a professional advisor before making any financial decisions.

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