Is Accounts Payable A Temporary Account?

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One of the popular concepts in accounting is accounts payable (AP) which simply means the amount of money that a business owes to its suppliers or vendors, for the products or services offered on credit. Now, the important question is, is accounts payable a temporary or a permanent type of account? Let's find out.

What are Temporary Accounts?

Temporary accounts are ones that one gets to close at the close of the particular fiscal year. They are not accumulated to the subsequent financial period. Common examples include:

- Revenue accounts - Records and accumulated revenues such as sales, fees, earned interests, and others that are clear to the income summary account at the end of the financial year.

- Wages/bonuses - It is used to record wages, bonuses, and salaries among other expenses; the balances are transferred to the income summary at the end of the year.

- It is primarily used to record the dividends paid to the stockholders of the company. Both of the amounts were transferred to the retained earnings account.

- Income Summary - A temporary account that holds details of all temporary accounts at the end of the period to facilitate closing and is closed to the permanent retained earnings account.

However, unlike temporary accounts, balance sheet accounts such as assets, liabilities, and equity accounts retain the balances obtained at the end of an accounting period forward into the following year.

Is Accounts Payable Reported on the Income Statement as a Temporary Account?

Like the cost of goods sold, accounts payable are classified under the current liability account and not the temporary account. The accounts that are still due and payable but have not been paid by the business are the unpaid bills that, are owed to vendors and suppliers. Consequently, the AP balance remains with the business for more than one accounting period and does not get transferred to the income summary.

Every vendor bill incurred gets entered in the accounts payable controlling account in the whole fiscal year. The balance sheet is now complete, and the AP balance with total unpaid vendor obligations remains in the general ledger at the end of closing. It appears in the first account payload of the new financial period when the account books re-open.

Characteristics of Accounts Payable

Here are some key characteristics of the AP account:

- Liability account – It is shown as the current liability as per the balance sheet and represents outstanding bills due.

- Organized account – AP holds debit balances from one year to another. Temporary accounts always have a zero balance at the end of the trial balance.

- = 365 / Average AP This gives an indication of how many times on average AP gets paid off during a year Payables turnover ratio

- Supporting papers – AP requires original and legal supporting papers such as suppliers’ invoices, contracts, purchase orders, etc. before accountants can make any payable.

- Subsidiary accounts – This is a master account for total payables and has several subsidiary accounts for payables to specific vendors based on the terms of the payment.

Closing Process Implications

Temporary accounts only are closed during this process to the income summary account. Accounts payable, being an example of a permanent account under the liabilities section of the balance sheet, stays open alongside other balance sheet accounts. All the outstanding vendor balances that have not been settled up to the end of the year just forward to become the opening balances to AP in the new accounting period.

In Summary

Accounts payable are real debts that are still owed to the suppliers or vendors for all products and services that were provided but not paid for yet. Thus, it cannot be a temporary account that will be closed because the unpaid debts are carried forward to the next periods. The AP control account and the payables subsidiaries therefore are referred to in the balance sheet as permanent accounts.

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