Bookkeeping 101 | Accounts payable: asset or liability?
Since you’ve reached this article, we can cautiously assume you’re trying to make sense of some baffling accounting terms. So let’s get down to brass tacks: it will be short and painless— we promise!
The TL;DR answer is that accounts payable go down as liabilities on your balance sheet.
To understand why, let’s break down each of the terms:
- Accounts payable
What’s accounts payable?
Accounts payable (sometimes referred to as “AP” or “A/P”) 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.
For example, say you bought $5,000 worth of merchandise and have to pay for it within 30 days from the invoice date; this amount is considered accounts payable until it’s paid. In simpler terms, accounts payable equals your unpaid bills.
If you want to know more about accounts payable you can read more about accounts payable in this article.
What are assets?
Assets are anything that has economic value to your business. Here are some examples of assets:
- Someone’s obligation to pay you money
What are liabilities?
Liabilities are your business’s financial obligations, or, in other words, its unpaid debts. Here are some examples of liabilities:
- Vendor bills
If you want to know more about assets and liabilities, please read this article.
Is accounts payable an asset or a liability?
Say you purchased supplies from a vendor for $5,000, and the invoice payment terms are net 30. So until you pay your vendor you have a short-term debt (meaning, accounts payable, remember?) in the amount of $5000. And unpaid debts are registered as a liability.
So, accounts payable is a liability!
Is accounts receivable an asset or liability?
While we’re on the subject, accounts receivable are the flip side of accounts payable (meaning – money you’re owed), so it’s an asset. Here’s an article explaining why.
How to manage your accounts payable
Now that you know what AP is, the next step is understanding that you must manage it properly. Accounts payable management is a crucial part of running your business. It affects your cash flow and your relationships with vendors. If you don’t put it down in your books accurately it can also cause a mess come tax season.
The best way to manage your accounts payable is with a service like Melio. Melio helps you pay vendors with free bank transfers, send checks, and pay by card even when vendors don’t accept cards. Melio syncs with all the leading accounting software to save you time on data entry and has no sign-up or monthly fees, whatsoever.
Set up your account and schedule your first bill within minutes.