When it comes to drawing up a balance sheet, an organization’s accounts payable come into play. When working on a balance sheet, you will need to determine whether accounts payable are an asset or not. Generally, accounts payable are not an asset. Rather, it is a short-term liability.

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What are accounts payable?

Accounts payable represent short-term debts and money owed to a business’s sellers and creditors. Generally, accounts payable are short-term obligations that must be paid in the relatively near future.

Essentially, accounts payable represents a short-term IOU issued by a supplier to a business accepting goods or services without immediately disbursing cash.

How do accounts payable appear on the balance sheet?

A company’s balance sheet is generally broken down into three main categories, namely:

• Assets: Understand cash, cash equivalentsmarketable securities, accounts receivable, inventory, real estate, equipment, tools and more.

• Passive : These include accounts payable, other debts, rent, utilities, wages, taxes, insurance, bills and more.

• Equity: Reported on the balance sheet by subtracting the company’s total liabilities from its total assets.

Accounts payable appear on the balance sheet as current liabilities. Accounts payable are considered a liability because they represent a purchase made on credit instead of cash. Even if the purchase is finalized, the business must still pay the supplier or creditor to settle the accounts payable.

But companies usually make a double entry for accounts payable. In addition to including accounts payable on the liability side of the balance sheet, they often include assets purchased through accounts payable on the asset side of the balance sheet.

For example, the accounts payable amount of $500 for the purchase of a tool belongs to the liabilities side of the balance sheet. But the value of the tool itself belongs to the asset side of the balance sheet.

Accounts Payable and Accounts Receivable

At first glance, accounts payable and accounts receivable may seem similar. But it is important not to confuse these two distinct issues.

As mentioned, accounts payable is considered a liability. On the other hand, accounts receivable are considered an asset. This is because accounts receivable represent funds that other businesses owe to the organization.

Importance of Accounts Payable

Accounts payable represent short-term debts. Although terms may vary, accounts payable generally must be paid within 30 days. For businesses, it’s important to keep an eye on repayment strategy, especially with such a short repayment window. Without effective cash flow management, accounts payable can become delinquent.

In many large organizations, the accounts payable team is very important. Here’s a look at some of the reasons why effective accounts payable management is important:

• Access to accounts payable simplifies business processes. A business must often procure goods and services from suppliers. If the supplier allows the company to accept the good or service without providing a cash advance, the company can continue its business processes without delay.

• Establish relationships with suppliers. If you manage your accounts payable well, suppliers will always be paid on time. When suppliers are paid on time, working relationships can improve and potentially lead to discounts or more favorable reimbursement terms in the future.

• Cash flow management. Accounts payable gives businesses some flexibility in their cash flow management. You will not necessarily need funds to pay for the goods and services you need. Instead, you can accept the goods and handle the refund in the coming weeks.

• Cash management forecasts. If you track your accounts payable from year to year, you’ll likely notice trends where your business is consuming more capital. You can use this information to create accurate cash flow forecasts and optimize working capital in the years to come.

• Tracking prevents errors. By carefully tracking your accounts payable, it’s easier to avoid errors and stop fraud.

Poor accounts payable management can lead to bigger business problems.

For example, if it becomes known that a company is not paying its accounts payable in a timely manner, your preferred suppliers may no longer extend credit in the short term. Instead, suppliers may ask you to pay for goods and services before you receive them or as you receive them.

Depending on the nature of your business, lack of access to short-term credit in the form of accounts payable could be a real problem.

How to Record Accounts Payable

If you want to report a payable account on your balance sheet, use these two steps as a guide:

• Receive the invoice. After accepting goods or services from a supplier, you will likely receive an invoice. On the invoice you will see exactly how much you owe the seller and the repayment schedule.

• Balance your entry. If you purchased an asset using a credit account, you can balance the credit in your credit account with the new asset. For example, if you purchased a $500 tool with credit from a vendor, you can include that tool as an asset on your balance sheet. In the liability section of your balance sheet, you can add the accounts payable bill of $500.

Accounts payable and other liabilities

Accounts payable are not the only type of liability you may have on your balance sheet. The main difference between accounts payable and other types of liabilities is the expected repayment schedule. Generally, accounts payable should be paid in the short term. On the other hand, other liabilities can include current expenses or long-term debts.

Here’s how accounts payable compares to other common types of liabilities:

• Long-term debt: If you financed a property for professional use with a 15 year mortgageit’s a handicap. But the long duration and continuous nature distinguish this type of debt from short-term accounts payable.

• Fees to pay: These expenses accumulate over time and must be paid when the bill is due. For example, utilities and salaries needed to run your business fall under expense charges.

Final Take

Accounts payable represent the liabilities on your balance sheet. As a short-term debt instrument, it is important to keep track of repayment windows related to accounts payable.

FAQs

Here are answers to some of the most frequently asked questions about accounts payable.

• Are accounts payable an asset?

• Are customer accounts an asset?

  • Generally, customer accounts are considered assets because they represent funds owed by other organizations in the short term.

• What are AP days?

• Is accounts payable a credit or debit?

  • Accounts payable represents the money an organization owes to vendors and suppliers for items and services purchased on credit. Since the purchase is made on credit, it is recorded as a credit account. But this liability could hurt your bottom line.

This article was originally published on GOBankingRates.com: How accounts payable are recorded on a balance sheet