Is Accounts Payable A Current Asset?
Accounts Receivable the opposite of accounts payable is the record of money owed to the business Is Accounts Payable A Current Asset?
This issue causes a lot of confusion among business owners and accounting professionals because accounts payable have characteristics of both a current asset and a current liability. While the name of the account is given as ‘accounts payable,’ which may sound like a positive account given that it is an ‘account’ that is ‘payable,’ it is quite distinct from accounts receivable in terms of accounting. ‘Therefore, is accounts payable a current asset?
The short answer is no, accounts payable is not considered as a current asset but rather is a current liability. However, let’s concentrate on this topic, which requires additional clarification, and it will be the focus of this article.
What is Accounts Payable?
To start with, it will be useful to provide a clear and concise description of what accounts payable entails.
Accounts payable on the other hand relates to amounts that a company is indebted to short-term creditors or suppliers for the goods or services that have been bought on credit. Common examples of accounts payable include:
- The purchases of inventory which are bought through credit terms
- Goods and assets purchased for use in the business but not yet paid for
- Non-direct material such as Utility expenses, Rent, or Freight Out that has been utilized but not yet paid.
These are costs that have been incurred as a result of receiving the inventory, supplies, services, etc., but no payment has been made yet hence giving a short-term liability or obligation to pay the respective vendors in the short-term.
Account payable normally indicates that the money is expected to be paid within one year or within one business cycle, which qualifies for classification as a current liability. A credit to an accounts payable entry is normally to an offsetting account, which may include inventory, supplies, or administrative expenses or accounts of the like, which were elevated to record the liability.
Why is Account Payable not an asset?
Now it is comprehensible as to why accounts payable emerges as a liability as opposed to an asset. However, to further draw a clear distinction between the classification of accounts payable and the classification of a current asset, let us summarize the characteristics of accounts payable below.
Current assets are assets that have a probable future economic benefit, or which can be used soon to provide a significant cash inflow. Common examples of current assets include cash, readily marketable stocks, receivables, stocks, and materials.
Accounts payable lack the essential traits of an asset:
- It does not create any policy that will generate future business revenues for the company.
- It does not involve an input over which the company has control arising from past events or transactions
- Rather, it presupposes a future delivery of cash or other valuable assets to the holder of the security
In conclusion accounts payable is unique from other accounts for instance the cash account, the inventory or the supplies account which are recognized as assets. It is on the other hand accrued when the company acquires inventory and supplies which is a liability to the company as it owes the vendors.
Next, let us determine where on the balance sheet Accounts Payable sits.
Now that we have demystified the misconception that accounts payable qualify as an asset, where does this category belong in the balance sheet exactly?
Accounts payable are reported in the section of current liabilities in the balance sheet of a particular organization. It is typically the most significant current liability account after it may use short-term debt borrowings such as an operating line of credit. Other typical current liabilities that sit alongside accounts payable include:
- Accrued liabilities: Accounts payable, taxes payable, interest payable
- Unearned revenue: Customer cheques and deposits, gift cheques, advance payments
- Short-term debt: Long-term debt – current portion, line of credit
Accounts payable is considered as one of the working capital and cash flow management where tracking is done on accounts payable. Although offering credit to suppliers results in smooth cash flows since money is paid at a later date, this directly impacts this current obligation until due dates. Hence, it is a constant challenge to Payable Management payment terms to get the most favorable balance.
The Takeaway
From the context where the term “accounts payable” is defined, it may be interpreted that this is a cash account, it reflects the unpaid bills to the suppliers of inventory and services. It is counted as a current liability in the balance sheet and not as an asset.
It is therefore important to have a correct recognition and classification of accounts payable in the statement of financial position to report the working capital ratio. Hopefully, this should clarify any confusion on whether or not accounts payable is a current asset.