Accounts payable (AP) is a liability—it's the money your business owes to suppliers and vendors for goods or services you've received but haven't paid for yet. It shows up in the current liabilities section of your balance sheet. This is one of the most common accounting questions small business owners have, so let's walk through why AP is a liability and what that means for your books.
What are assets vs. liabilities?
Before we get to whether accounts payable are assets or liabilities, it helps to understand what these two terms mean.
What are assets?
An asset is anything a business owns that holds value—from cash in the bank to real estate and intellectual property. Accounts receivable (like outstanding invoices you've sent to clients) are considered assets too.
Managing your assets effectively is critical for your company's long-term success. Assets help you pay your bills, invest in new equipment or technology, and become more profitable.
What are liabilities?
A liability is an obligation or debt that a company owes to vendors, suppliers, or service providers. They represent claims on a company's assets and come from past transactions or events.
Liabilities fall into two main categories:
Current liabilities are obligations expected to be settled within one year or one operating cycle, whichever is longer.
Long-term liabilities are obligations not expected to be settled within the next year—items with a longer maturity or payment period.
Liabilities are an important part of your balance sheet because they help you get a clear picture of your company's financial health. If you have more liabilities than assets, you may need to re-evaluate your operations and financial management. If you have more assets than liabilities, your company is in a more stable financial position.
Are accounts payable an asset or a liability?
The short answer: accounts payable (AP) are a liability.
Accounts payable is how much money your business owes suppliers or vendors for goods and services that have been received but not paid for. AP is sort of like a credit card—you received the goods or services already, but you'll pay the bill later.
For instance, imagine your business orders office supplies from a vendor. You receive the supplies along with an invoice stating payment is due in 30 days. At that point, those supplies become an account payable—a liability—because you owe money to your supplier.
What makes accounts payable a liability?
Because accounts payable represents a debt owed to another party, it's a liability—specifically, a short-term debt your business owes to another company.
On a balance sheet, accounts payable is typically classified as a current liability, meaning it's expected to be settled within a short period. As the company pays off its accounts payable, the liability is reduced.
Common examples of accounts payable include:
Supplier or vendor invoices for inventory or materials bought on credit
Utility bills you've received but not yet paid
Rent owed to a landlord for the current period
Contractor or freelancer invoices with payment terms (for example, net 30)
Recurring service bills like software subscriptions billed in arrears
Each of these is money you owe for something already received, which is exactly what makes it a payable rather than an expense you've already settled.
Is accounts payable a debit or a credit?
Accounts payable normally carries a credit balance. When you record a new bill you owe, you credit accounts payable (which increases the liability) and debit an expense or asset account—for example, office supplies. When you later pay that bill, you debit accounts payable (reducing the liability) and credit cash. So a rising AP balance means unpaid bills are accumulating, and paying them down lowers the balance.
Accounts payable vs accounts receivable
Accounts payable and accounts receivable are mirror images of each other. Accounts payable is money your business owes to suppliers—a liability that sits in current liabilities. Accounts receivable is money customers owe you—an asset that sits in current assets. The same invoice is accounts receivable to the business that sent it and accounts payable to the business that received it. Tracking both tells you what's coming in and what's going out, which is the heart of managing cash flow.
Accounts payable | Accounts receivable | |
|---|---|---|
What it is | Money you owe suppliers | Money customers owe you |
Balance sheet | Current liability | Current asset |
Normal balance | Credit | Debit |
Same invoice | Payable to the recipient | Receivable to the sender |
How do I find accounts payable on a balance sheet?
Accounts payable is typically listed as a current liability on your company's balance sheet. The balance sheet is a financial statement that provides a snapshot of your company's assets, liabilities, and equity at a specific point in time.
Here's how to find accounts payable on your balance sheet:
Locate the current liabilities section. A balance sheet is divided into three main sections: assets, liabilities, and equity. Accounts payable falls under liabilities—look for the heading "Liabilities" or "Current Liabilities."
Find the accounts payable line item. Within current liabilities, look for the specific line labeled "Accounts Payable."
Check the amount. The figure next to the line item represents the total your company owes suppliers or vendors for goods and services received but not yet paid for.
Review additional details. Some balance sheets add detail like payment terms or accrued liabilities.
If you have questions about your accounts payable, it's never a bad idea to ask your accountant to walk you through each item on your balance sheet.
Stay on top of accounts payable
Whether you're managing inventory or a team of freelancers, accounts payable can be tough to handle. Staying on top of your AP is crucial for maintaining good supplier relationships and keeping your business financially healthy.
If you're looking to simplify your accounts payable, you can learn all about AP automation for small businesses.
Relay is an online banking and money management platform that lets small business owners open multiple business checking and savings accounts with no monthly maintenance fees—so you can set aside money for the bills you owe and pay suppliers on time, every time.
Frequently asked questions
Is accounts payable an asset or a liability?
Accounts payable is a liability. It's the money your business owes suppliers and vendors for goods or services you've received but not yet paid for, and it's classified as a current liability on the balance sheet.
Is accounts payable a debit or a credit?
Accounts payable normally has a credit balance. You credit accounts payable when you record a new bill (increasing the liability) and debit it when you pay the bill (decreasing the liability).
What's the difference between accounts payable and accounts receivable?
Accounts payable is money you owe suppliers (a liability). Accounts receivable is money customers owe you (an asset). The same invoice is receivable to the sender and payable to the recipient.
Where is accounts payable on the balance sheet?
Accounts payable appears in the current liabilities section of the balance sheet, listed as its own line item showing the total your business owes suppliers for goods and services received but not yet paid for.
