Is Accounts Payable An Asset Liability Or Equity?

Account payable is among the current liabilities in the balance sheet and is not classified under current assets or shareholders’ equity. AP refers to the amount of money that a business will have to pay out to its creditors or suppliers for products and services that were offered on credit. That is, AP is an account that represents the amount of debt that is due to the company.

Understanding Accounts Payable

This is an account in the current liability category of a company’s balance sheet. There are short-term obligations that are to be paid within a year or a single operating cycle. Some of the other examples of current liabilities also include short-term loans, payroll expenses, interest to be paid, taxes to be paid, and the customer’s advances or unearnings revenues.

Working capital is also determined partly by AP as one of the essential components in evaluating a company’s working capital. Working capital is an essential financial ratio that shows the financial health of companies and their capacity to meet short-term obligations. Accounts payable are normally monitored frequently by the management to ascertain that they can be settled without much hassle and ensure that high balances of AP are not generated.

Key Characteristics of Accounts Payable:

- Liability account: It is recognized as the amount of money that a company is liable to pay in the course of its operations.

- Current liability: The liability is payable within one year or within the time it takes to operate one cycle of the business.

- Furnished by acquisition for cash credit. Whenever an inventory or service has been received, though not paid for yet, it increases AP.

- Reduced by four hundred thousand by the use of cash to pay suppliers. The AP balance reduces progressively as any due amount is paid or settled in the course of business transactions.

- Calculated as: Starting AP balance + Additional AP during the period – Payments made to the APs = Total AP at the end of the period

In this article, it is demonstrated why Accounts Payable is not an asset.

Assets are resources with potential economic value that are controlled by a company and can make a future profit such as receiving cash. They are useful for the company as they possess future economic benefits. Accounts payable do not meet the definition of an asset because:

- It does not belong to the company and as such is not a resource that is controlled by the company. It is a claim on the assets of a business that is owed to the creditors or can be explained as what the business owes to its creditors.

- Unlike human capital, it does not offer returns on investment in the future economy. On the other hand, AP is to be paid by cash in the future and hence is a liability in the current period.

- AP is recorded in the balance sheet with its opposite which is known as liabilities. Assets are the credit or positive balances while on the other hand, liabilities are represented by debit or negative balances.

Examples of typical assets that do yield future economic benefits include cash, receivables, inventory, property, and equipment among others. Accounts payable do not share the same characteristics as these spots.

Since Accounts Payable is not an asset, then it cannot be equity.

Equity refers to the net value of the assets that are owned by the owners or shareholders of a given organization or company after that value has been reduced by the total value of the liabilities of the company. The most common examples of equity accounts are:

- Common stock
- Preferred stock
- Retained earnings
- Treasury stock

Equity balances the total of the shareholders’ stake that would be received in case of the company’s liquidation. In simple, terms equity means the provision of capital or funds to own a company’s fixed assets.

We can understand that accounts payable do not have any symbolic sense of residual ownership interest in a firm. AP is also not a source of finance or funding and is seen as a liability that has to be paid back. Thus, payable accounts differ significantly from equity accounts.

The general ledger should be used to record accounts payable business transactions.

Because AP is a liability, increases and decreases to this account follow the rules of debits and credits for liabilities:

- An increase in accounts payable is recorded by using the CREDIT side of the double-entry accounting equation.

- Reductions in accounts payables are recorded as debits.

Here are some common AP transactions and how they are recorded:

- Buying of inventories or services on credit – Credit AP (which increases liability).

- To pay an invoice using cash, thereby decreasing an account payable owed to a supplier – Debit AP (decreases)

- Issuing prior period adjusted note from an unpaid supplier’s invoice – Credit AP (increasing accounts payable)

- Cancelling of accounts payable because the business is unable to recover from the supplier – Debit AP

The debit and credit treatment above is in harmony with the standard accounting practice of double-entry bookkeeping where the total debits must tally with the total credits for a transaction.

Conclusion

In conclusion, accounts payable can be conclusively deemed to be a current liability in the sense that it is money owed by the company and is due to be paid in the short-term which is within the current period of business operations or the one financial year. AP cannot be said to be an asset, as it is defined as an element that exhibits the qualities of an economic resource controlled by a business that offers future benefits. Also, it is important to note that AP is not an equity account or a direct counterpart of net assets that can be attributed to owners of the company as a result of eliminating liabilities. Thus, if AP is classified as a liability account on the balance sheet while all transactions to accounts payable reflect debits and credits accurately, business organizations would achieve accurate and credible financial statements.