Is accounts payable an asset or a liability?

Business accounting teams regularly handle financial statements, ledgers, and reports.

A key part of this process is managing accounts payable (AP)—the money your company owes to suppliers. But how should it be classified? Is accounts payable an asset or a liability?

The short answer: It’s a liability because it represents unpaid obligations to creditors.

But why does that matter, and how does it impact on your business’s financial performance? This guide breaks it all down, helping you confidently manage AP and keep your books in order.

Here’s what we cover:

Understanding assets and liabilities

Before diving into accounts payable, it’s helpful to take a step back and explore assets and liabilities. They are two essential concepts that shape your company’s balance sheet.

Understanding the difference between the two will help to ensure your team delivers accurate financial records and maintains finances on track.

What is an asset?

An asset is anything your business owns that has value and can help generate revenue.

Whether it’s cash in the bank, inventory on the shelves, or equipment used for daily operations, assets provide economic benefits and contribute to business growth.

Examples of assets

• Cash and cash equivalents: money available in your bank account, ready to use for expenses, investments or business operations.
• Accounts receivable (AR): payments owed to your business by customers for goods or services already provided.
• Inventory: products, materials, or supplies your business holds for sale or production.
• Property, equipment, and vehicles: tangible assets such as office buildings, machinery, computers, or company vehicles that support daily operations and long-term growth.

What is a liability?

A liability is the opposite of an asset. It’s money your business owes to someone else.

This includes outstanding bills, loans, and other financial obligations that need to be paid.

Managing liabilities effectively makes sure your business stays financially healthy and avoids cash flow problems.

Examples of liabilities:

• Loans payable: business loans or borrowed funds that must be repaid over time, often with interest.
• Salaries payable: wages owed to employees for work already completed but not yet paid.
• Taxes payable: business taxes owed to the government, including income tax, sales tax, or payroll tax.
• Accounts payable (AP): money owed to suppliers for goods and services already received but not yet paid for, typically due within 30 to 90 days.

Is accounts payable an asset or a liability?

Accounts payable is a liability, not an asset.

AP represents short-term financial obligations that your company must pay, typically within 30 to 90 days.

It appears on the liabilities section of the balance sheet because it reflects unpaid debts rather than money or assets owned by your business.

When considering accounts payable liability or asset, think of it as a pending bill—your business has received a product or service but hasn’t made the payment yet.

Until the amount is settled, it remains a liability rather than an asset.

Is accounts payable a debit or a credit?

In accounting, every transaction involves debits and credits using the double-entry system.

When recording an accounts payable entry:

• Credit AP to increase the liability (since it represents money your business owes)
• Debit the corresponding expense or inventory account to reflect what was purchased.

When making a payment:

• Debit AP to reduce the liability (since the debt is being settled)
• Credit cash or bank to show the outgoing payment.

Because accounts payable represents money owed, it’s recorded as a credit balance on the books until the payment is made.

The role of accounts payable

Accounts payable is essential for cash flow management and strong supplier relationships. Keeping AP organized makes sure your business:

• Manage short-term liabilities by tracking what your business owes to suppliers and vendors for goods already received but pending payment.
• Maintains a strong credit reputation by paying suppliers on time, building trust and keeping business partnerships running smoothly.
• Improves cash flow by tracking and managing outgoing payments, allowing for better budgeting and financial planning.
• Takes advantage of early payment discounts, helping reduce costs when payments are made ahead of schedule.
• Avoids late fees and supply chain disruptions by settling debts promptly, ensuring continuity in operations.
• Support accurate financial reporting by providing reliable data for preparing sheets, income statements, and cash flow reports—offering a clearer picture of your company’s financial performance.
• Stay compliant with tax laws and regulations by keeping accurate records of all financial transactions and reporting them correctly.

Accounts payable vs accounts receivable

To fully understand the role of accounts payable (AP) in accounting, it’s important to know the difference between accounts payable and accounts receivable (AR).

AP refers to the money your business owes to suppliers for goods or services received, while AR represents the money customers owe to your business for products or services you’ve already delivered.

Balance sheet classification:

• AP: recorded as a liability
• AR: recorded as an asset.

Effect on cash flow:

• AP: reduces cash when payments are made
• AR: increases cash when payments are collected.

Payment terms:

• Both AP and AR are typically due within 30 and 90 days.

Accounts payable as liabilities examples

If you’re still wondering how is account payable a liability, looking at real business scenarios can help clarify its role in financial management.

Here are a few common examples:

• Restaurant industry: you’re managing a restaurant and order $5,000 worth of food supplies from a vendor. The supplier delivers the goods and sends an invoice with a 30-day payment term. Until the invoice is settled, the amount is recorded as accounts payable, representing an outstanding liability.
• Manufacturing sector: as a manufacturing company, you purchase raw materials on credit to keep production running. The supplier delivers the materials, but payment is deferred for 60 days. During this period, the cost is recorded as an AP in the company’s financial records until the invoice is paid.
• Marketing and advertising: you’re running a small business and hire a marketing agency for an advertising campaign. The agency provides services and sends an invoice for $10,000, due in 45 days. Until the payment is made, the invoice amount is recorded as accounts payable on the balance sheet.

In each of these cases, accounts payable represent money owed for goods or services already received but not yet paid for.

Managing AP effectively ensures timely payments, strong supplier relationships, and a healthy cash flow.

Can you write off accounts payable?

Writing off accounts payable (AP) is not a standard accounting practice. But there are a few situations where it can happen.

AP can be removed from your company’s book if:

• The supplier forgives the debt: if a vendor decides not to collect a payment, the AP entry can be removed.
• Debt settlement negotiations occur: if your business and the supplier agree on a reduced payment, the excess AP amount is adjusted accordingly.
• The statute of limitations expires: if an unpaid AP remains outstanding for a legally determined period, in some cases, it may be written off.

Can accounts payable be long-term liabilities?

Accounts payable (AP) is typically classified as a current liability because it’s expected to be paid within a year. However, in rare cases, AP can be considered a long-term liability if:

• Your business negotiates an extended payment period beyond 12 months
• A supplier offers structured installment payments for a large purchase.

How to report accounts payable

Properly recording AP makes sure your accounting team delivers accurate financial reporting and keeps your books in order.

Here’s the step-by-step to report AP in your records:

1. Recording AP: when you receive an invoice, credit AP to increase the liability and debit an expense or inventory account to reflect the purchase.
2. Balancing the entry: double-check that the correct amount appears in your financial statements to maintain accuracy.
3. Recording the payment: once the invoice is paid, debit AP to reduce the liability and credit cash or bank to reflect the outgoing payment.

Optimize accounts payable with automation

Are you tired of manually tracking accounts payable (AP)?

This process can be time-consuming and prone to errors. That’s where AP automation makes a difference.

With the right AP software, your accounting team can:

• Save time by automating invoice entry and approvals
• Reduce errors by eliminating manual data entry mistakes
• Prevent fraud by flagging duplicate or suspicious invoices
• Seamlessly integrate with your existing accounting system.

Explore using accounts payable software and give your team the tools to work smarter, improve accuracy, and strengthen your financial management.