Is accounts payable an asset, liability, or equity?

Accounts payable is a liability. More precisely, it is a current liability on your balance sheet: the money your business owes to suppliers for goods and services it has received but not yet paid for. It is never an asset and never equity. If you hire someone to paint your office and they invoice you on 30-day terms, that invoice sits in accounts payable until you pay it.

The account people confuse it with is accounts receivable, the money your customers owe you. That one is an asset. The two sit on opposite sides of the balance sheet, and this article explains why, with a worked example of the debits and credits.

What is accounts payable?

Accounts payable is the amount your business owes to suppliers, contractors and service providers for goods and services received on credit. Each bill is cleared when you pay it, usually by bank transfer. Long-term liabilities such as business loans are different: they are repaid over a longer period, often with interest, and are not part of accounts payable. For how the process runs day to day, from receiving an invoice to approving and paying it, see our accounts payable 101.

One short-term liability that is usually kept separate from accounts payable is your payroll. Wages owed to employees, the PAYG withholding owed to the ATO and the super owed to employees’ super funds are processed through payroll and recorded as their own liabilities, not as supplier bills.

Is accounts payable a current liability?

Yes. A liability is an amount your business owes to someone else, and under AASB 101 a liability is current if it is expected to be settled in the normal operating cycle, is held for trading, is due within 12 months, or there is no right at the reporting date to defer settlement for at least 12 months. Supplier invoices on 7, 14, 30 or 60-day terms meet that test easily, so accounts payable is always a current liability. Trade payables settled within the normal operating cycle stay current even if settlement falls later than 12 months.

Non-current liabilities are the ones that fall outside that test, such as the part of a five-year bank loan that is not due within 12 months. A loan is assessed separately from trade payables: its current portion is a current liability and the rest is non-current.

Accounts payable vs accounts receivable

Accounts payable and accounts receivable are the two sides of trading on credit. Accounts payable is what you owe your suppliers, so it is a current liability. Accounts receivable is what your customers owe you, so it is a current asset. When a supplier records the invoice they sent you, it goes into their accounts receivable at the same moment it goes into your accounts payable.

If you are asking whether accounts payable is an asset, you are probably thinking of accounts receivable. Our guide to how accounts receivable works covers the other side.

What are assets, liabilities and equity?

Understanding these three terms is essential to reading a balance sheet. They are linked by the accounting equation: assets = liabilities + equity. Put another way, equity (what the owners have in the business) is what is left when you subtract liabilities from assets.

What are assets?

Assets are things that can bring your business future economic benefit. This can include cash, money you are owed, or property that can be used or sold.

Some examples of common business assets include:

• Cash your organisation has in its bank accounts
• Property that you own
• Equipment, including vehicles and machinery
• Shares that you own
• Accounts receivable: money owed to you by customers
• Intellectual property, including patents and copyrights

What are liabilities?

A liability is an amount your business owes to someone else, whether that is a supplier, a lender, an employee or the ATO.

Common business liabilities include:

• Unpaid invoices from suppliers (accounts payable)
• Loans used to fund company operations
• Tax owed, such as GST, PAYG withholding and income tax
• Lease liabilities and mortgages
• Loans from shareholders

What is equity?

Equity is the owners’ stake in the business: the capital they put in plus the profits left in the business, less any drawings or dividends. Accounts payable is not equity. Buying something on credit does not change what the owners have in the business. It adds an asset and a liability of the same amount.

Where does accounts payable sit on the balance sheet?

Accounts payable sits under current liabilities on the balance sheet, labelled “trade and other payables” or “trade creditors”. It appears on the balance sheet only, not on the profit and loss statement. The expense or asset behind each bill is recorded when the bill is, and the payable is the amount still owing at the reporting date.

Your balance sheet shows your business’s assets, liabilities and equity at a specific point in time. Most businesses review it monthly or quarterly. It helps you understand the financial health and liquidity of your business, and our guide to reading a balance sheet walks through a full example.

Is accounts payable a debit or a credit?

Accounts payable is a credit-balance account, like every liability. Recording a new bill credits accounts payable, which increases the balance. Paying a bill debits accounts payable, which reduces it. In a T account, bills land on the credit (right) side and payments on the debit (left) side, and the balance owing is the difference between the two.

Here is a simple example. Your business buys $2,200 of stock (including $200 GST) from a supplier on 30-day terms. When you record the bill, you debit inventory $2,000 and debit GST paid (a GST credit) $200, and credit accounts payable $2,200. Your assets and your liabilities both rise by $2,200, so the balance sheet still balances.

When you pay the supplier 30 days later, you debit accounts payable $2,200 and credit your bank account $2,200. The liability is cleared and your cash falls by the same amount. Equity does not change at any point, because buying stock on credit is not an expense until the stock is sold.

Examples of accounts payable

Anything a supplier has invoiced you for and you have not yet paid is accounts payable. Common examples include:

• Supplier invoices for stock, materials or goods for resale
• Invoices from contractors and freelancers who are not on payroll
• Bills for utilities, rent, phone and internet
• Software subscriptions and professional services invoiced in arrears
• Office supplies and maintenance ordered on account

Amounts you owe but have not yet been invoiced for are accruals rather than accounts payable, and wages, super and PAYG withholding are payroll liabilities. All of them are current liabilities, but your bookkeeper keeps them in separate accounts so the balance sheet reads clearly.

Who tracks accounts payable?

Your bookkeeping or finance team is responsible for accounts payable processing and reporting. For larger amounts, you may want an owner or manager to approve the bill before a payment is made.

In the early days of a business, the owners often pay bills themselves. As you grow, you will need help to keep up with the volume of bills and the controls needed around them. Late payments can damage supplier relationships and attract late fees, so if the bills are starting to pile up, getting help with your bookkeeping frees up your time.

Enlisting help with accounts payable

Are you at a point where you need help with your bills? Visory runs accounts payable, payroll, bookkeeping and accounts receivable for growing businesses. A dedicated team, working with Delphi, Visory’s AI, keeps your bills paid on time and your balance sheet right.