Is Accounts Payable An Expense?

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AP is probably one of the most widespread line items that companies include in their balance sheet accounts. However, about this, there is always some confusion of whether or not the accounts payable should be considered to be an expense. Now, let us demystify the difference between accounts payable and expenses as well as when AP is indeed an expense.

What Is Accounts Payable?

Accounts payable is the liability that results from the use of credit from suppliers and other vendors for supplies, goods, and services. It is, in fact, a kind of working capital credit where suppliers offer the cash and goods Crone and Stevens (2007, p. 169). If a firm purchases inventories, materials, supplies or any other goods and services on a credit basis then accounts payable is the resulting liability.

For instance, if a retailer buys goods worth $ 10,000 with the agreement that they will pay for the goods in 30 days while the supplier offers net 30 terms, the accounts payable will amount to $ 10,000 and it is recorded under current liabilities. It shows an expense that is a liability for the retailer, which must be paid within one year.

Key Things To Know:

- Accounts payable is a payable position that indicates a future commitment to pay for the supplies and merchandise received in the business.

- It is a negative account on the balance sheet because it represents an amount that the business has spent and which it needs to repay.

- Accounts payable is not an expense at the time when the raw materials or the supplies were purchased.

Why AP Is Not An Expense

It is confused with the account expenses by many people. But they are very different accounting concepts:

Cost – It refers to the amount of money or value that was used to purchase an asset or goods for business during an accounting period. Costs feature on the income statement and have the natural tendency of directly decreasing net income totals.

Accounts payable – Reveals commitment to make payments for expenses in the future. From the balance sheet, we find that AP has the appearance of being an asset.

Therefore at the time when a business takes accounts payable it has not recorded any amount of cash has not been spent or an expense is not recorded in the income statement. It may take months, or even years before the company pays off its AP balance in full to eliminate an actual expense.

When does Accounts Payable become an Expense?

Directly, accounts payable does not constitute an operating expense but the purchase transactions falling under the accounts payable line will convert to expenses at a later date when payment is made.

Here is the typical sequence of accounting events:

1. This means that the company purchases its inventories or materials on a 30-day credit basis. Accounts payable has $10,000 outstanding, which was not the case before.

2. After 30 days, the AP of the Company is settled by issuing a cheque of $ 10,000 to its suppliers.

3. The $10,000 cash payment is recognized as SG&A expenses similar to COGS or Supplies expenses.

The recording of the expense occurs at the time accounts payable become due and get paid off, not at the time the AP line was created.

In its essence, accounts payable can be defined as a way of delaying a cost. Basically, through the use of credit terms in making purchases of various items, the company has delayed the recognition of such items’ costs as expenses. Payables, especially accounts payable, paid later on will lead to expensing those item costs in operating expenses.

In Summary

Even though accounts payable, as the name might suggest, is a liability through which a company agrees to pay for items in the future, it is not an expense in itself. AP is recorded on the balance sheet as an account payable rather than it is recorded on the income statement. Nevertheless, it is important to point out that paying off accounts payable will result in recognizing expenses such as Cost of Goods Sold or Supplies Expense. Thus, after some delay, accounts payable turn into the expenses of the company.

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