Are Accounts Payable an Expense?
What Are Accounts Payable?
Accounts Payable (AP) is a liability, where a company pays money to one or more creditors. Accounts payable is often confused with a business's basic operating expenses. However, accounts payable are shown on a company's balance sheet and the expenses they represent appear on the income statement.
Key Points
Accounts Payable (AP) is an account within the general ledger that represents a company's obligation to pay short-term debts to its creditors or suppliers.
Accounts payable refers to liabilities on the balance sheet that have not yet been paid.
Accounts payable represent an important part of working capital and should be analyzed as part of working capital management.
Liability Account Versus Expense Account
The best way to distinguish between liabilities and expenses is to perform a cash flow analysis. Liabilities are obligations that have not yet been paid. Expenses are expenses incurred to generate income, but may not be paid.
Liabilities appear on a company's balance sheet, which presents a clear, easy-to-understand snapshot of a company's financial position over a specific time frame. Accounts payable are traditionally recorded in the accounts payable subsidiary ledger when an invoice is confirmed for payment. A voucher simply means that the invoice has been approved for payment and is recorded as an accrued liability in the general ledger, where the payment transaction is still in process. These payables are often referred to as trade payables.
Liability accounts include interest payable on debts owed to creditors, known as accrued interest, as well as tax liabilities owed by the company, known as taxes payable. These are not included in accounts payable.
Debts owed to lenders must usually be paid within 30 days or less. Importantly, these payments do not include a promissory note. For example, mortgage obligations will not be grouped with accounts payable because they actually come with a promissory note. For this reason, mortgage obligations fall under “notes payable,” and none of them are classified as accounts payable.
Expenses appear on a company's income statement, which describes revenues and expenses to show net income for a given period. An example of an expense transaction is any cost incurred when a salesperson attempts to generate income on a networking trip. These expenses may include housing, client dinners, car rentals, gasoline, office supplies, and multimedia materials used in presentations.
Logistics Tracking Measures
It's no surprise that keeping track of accounts payable can be a complex and difficult task. For this reason, companies typically hire bookkeepers and bookkeepers who often use advanced accounting software to monitor invoices and outgoing cash flows.
These tracking responsibilities become increasingly complex with large companies that have multiple lines of business, and with large product manufacturers that produce multiple stock keeping units (SKUs). For such organizations, bookkeeping staff increasingly rely on the use of specialized accounts payable automation solutions – often referred to as “ePayables” – to eliminate the paper and manual elements associated with reconciling an organization's invoices. The process can be simplified by automating it.
