Are Credit Cards Accounts Payable?

To answer this question, one must first understand the basic concepts of credit cards, and accounts payable, and what differentiates the two.

Credit cards, as well as other types of cards, are well-known and actively used payment and financing instruments in today’s world. Credit card usage is common for purchasing commodities, and controlling expenditures by both the customers and companies. This leads to a critical accounting issue – should credit card balances remain as accounts payable to the business? In the following subtopics, this issue will be described in further detail.

What are Accounts Payable?

Accounts payable is one of the key accounting concepts that should always be considered in organizations. Accounts payable is the money due to creditors and the suppliers of goods and services. Common examples of accounts payable include:

- Snapshots on accounts receivables from customers for products, merchandise, or work done
- Borrowings such as overdrafts from banks or other financial institutions for short-term needs
- Housing allowance, rent arrears, back paid rent to landlords
- Outstanding bill reversals for power and gas companies

Accounts payable are classified under the current liabilities as they are usually short-term obligations that are expected to be paid within one year. Information tracking, reporting, and managing or maintaining accounts payable is another accounting activity. Companies would like to avoid incurring additional costs of late payments or may face legal actions and collection.

Accounts payable is defined as the amount of money owed by a business firm to its suppliers, and its key characteristics include the following:

There are two key characteristics of true accounts payable:

1. They are business expenses as opposed to personal expenses as the law defines them. They refer to actual expenses incurred in running the company and as such are valid expenses. Items like consumables, tools, leases, lighting, etc.

2. A vendor invoice is often available showing how much the business owes its vendor. The balance in the AP represents a specific liability that is recorded and recognized. The business has either been charged on the invoice by the vendor or has another authentic document showing the amount owed.

This paper aims to establish how businesses use credit cards to support their operations and needs.

Most firms use credit cards either to fund expenses and operations in their companies. Reasons include:

- Easy to use – Credit cards are instruments that can be used to pay for anything.
- Rewards – It is possible to earn card-specific cash back, points, or even miles on spending.
- Float – It is the difference between the account receivables and payables with the possibility of an extension of actual cash payment up to 30 days.
- Cash-Short – Can meet necessary expenses even if one has very little money.
- Emergencies – Useful when one is faced with some unforeseen or hurried expenditure.

As for other purchases, often employees are authorized to make minor expenses using business credit cards. Some of the other goods and services that may be charged on a more frequent basis include larger reoccurring expenses such as orders of inventory, supplies, etc.

Credit card balances refer to the money that has been spent and is yet to be paid for, it is evident that credit card balances are accounts payable.

In light of this, should every credit card account balance that a business has outstanding be regarded as account payable?

The short answer is typically no. Here is why:

- The vendor is the credit card company and not the various shops where the card is being run. There is no unique vendor invoice that relates to these accumulated transactions on the given date.

- It is just that credit card statements give a consolidated figure for total purchases as against giving details of various expenditures. It is important to note that the organization has not provided documented evidence of accounts payable in detail.

- Companies may use credit cards for business as well as personal undertakings and therefore a combination of the two should be allowed. Determining which are genuine business expenses is sometimes as simple as identifying charges by going through each transaction.

- There can be additional interest charges and other fees associated with credit card balances. Accounts payable are stated in principle amounts payable, not including interest or penalties.

- Credit card privileges may be abused and there may be purchases that are unauthorized or that were made too many times. Thus, it is still ambiguous whether expenses that have not been reviewed or approved are truly obligations.

- Masters do not match against a purchase order or receiving document as do credit cards. Accounts payable have the backing of a PO and receipt to show that the business received whatever was payable – goods or services.

Thus, the existing accounting rules and regulations require that balances on credit cards have to be accounted for differently from trade account payables. Specifically, credit card balances should be: Specifically, credit card balances should be:

- Included under the current liability account of short-term notes payable in the balance sheet.
- Accounts payable have to be presented separately from accounts receivable when preparing financial reports
- But before they are considered actual obligations, they go through some review and approval processes.

Credit card accounts payable refers to the amount of credit allowed to a customer for the purchase of products and services and a company must manage its credit card accounts payable efficiently.

It is also worth mentioning that credit card payments are not included in the accounts payable category, however, this does not exclude the necessity to pay attention to the card usage and pay the balances on time. Businesses should implement policies to responsibly manage corporate cards such as:

- Imposing personal credit constraints on each employee
- Most of the clients prepare their expenses every month and it is common to review the monthly card statements.
- The third one was to match receipts with credit card statements.
- I was looking for reimbursement of business-related expenses only.
- [This] entails that the card charges have to be approved by the managers.
- Never carry balances on cards and always pay them off in full each month to avoid interest charges.
- The discipline of documentation of the reconciliation of credit card AP

By adhering to these internal control best practices, business credit card concerns and costs will be less likely to occur.

The Takeaway

Of course, credit cards are a significant and effective means of payment for many organizations; however, credit card account receivables bear some significant differences to trade accounts payable to suppliers and vendors. It is imperative to maintain a distinctive record for business credit cards from the overall accounts payable. According to the guidelines and procedures highlighted in this article, it will be easier for the business to integrate the use of cards within the overall APs.