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Accounts Payable or AP, as it is commonly abbreviated, is considered to be a significant element of the financial and accounting systems of any organization. However, there is certain ambiguity regarding the fact that accounts payable fall under the category of liabilities in the balance sheet. Here in this blog post, we will demystify whether the accounts payable are a liability or not.

What Are Accounts Payable?

Accounts payable are; money that a business owes to its suppliers, vendors, contractors, or any other party to whom the business owes for products or services received on credit. Common examples of accounts payable include:

- Accounts receivables which are bills of exchange or notes receivable owing by customers for goods or services rendered or products sold
- Unpaid work done by a consultant/freelancer to a client
- Amounts due for the current cycle, including electricity, water, sewer, and gas.
- Pay-outs made to landlords for rent.

When a supplier or vendor gives a business entity permission to buy goods or services and pay at a later date this gives rise to account payable. These are money that appear on a company’s balance sheet as current liabilities until the respective amount is paid.

How Accounts Payable are Classified as Liabilities?

Accounts payable are generally recognized in the balance sheet as either short-term or current liabilities. This is because they fall under the classification of liabilities which are acknowledged as obligations that a business anticipates to settle within one fiscal year.

Concisely, the accounts payable are the specific kind of liability that occurs in the course of purchasing goods or services. The company receiving goods or enjoying the services receives benefits from the supplier and incurs a legal obligation to pay the amount later on, for instance, Net 30.

This fits the criteria of a liability since it is an existing obligation arising from a prior event that will need a future cash settlement to correct. Accounts payable can be a vital source of funds for a business, but if not recorded accurately, it distorts the financial status of a business organization.

Since accounts payable is a claim against the organization for goods and services received but have not been paid for, they fall under the definition of a liability. Making accounts payable as liabilities also enables a business to report expenses in the correct period based on the matching principle.

Other Examples of Current Liabilities The following are other examples of current liabilities: 14. Accrued expenses 15. Wages payable 16. Salaries payable

Accounts payable are almost always depicted on the balance sheet under the current liabilities line, though they do not comprise only short-term liability. Other standard current liability examples include:

- Wages, taxes, and interest that are owed to others but have not been paid out yet.
- Amounts received for customized products/ works from customers
- Bonds payable on more than one year, but which can be repaid within the next 12 consecutive months.
- Short-term sources of funds such as bank overdrafts, credit facilities
- Paid-in capital but declared but not yet issued

Therefore, in brief, accounts payable do conform to the definition of a liability that is outlined in a business text and they are rightfully placed under this category in a balance sheet. There is a need for accurate recording of AP for clarity of the financial statements and visibility in the unpaid supplier bills.

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