When managing business finances, one of the most common questions that arises is: “Is accounts payable an expense or a liability?” The confusion often comes from the fact that accounts payable (AP) involves money owed to vendors, which feels like an expense—but in accounting terms, the two are very different.
So, is accounts payable a liability? Is accounts payable a revenue or expense? In this blog, we’ll break down the difference between accounts payable, liability vs expense, and clear up these common misconceptions so you can better understand how AP impacts your company’s financial health. (Introduction ends here)
Accounts Payable – Liability vs Expense
An expense refers to a cost that has already been incurred for business operations. On the other hand, accounts payable (AP) refers to the money owed to suppliers/vendors for goods and services purchased on credit. Is accounts payable an expense?
The answer to this is that Accounts payable is not an expense.
Is Accounts Payable a Liability?
In a company’s balance sheet, accounts payable are recorded in the liabilities section as a current liability. Many people often ask, “Are accounts payable an expense?” The answer is no—accounts payable represent money the company owes, not an expense itself. However, when companies pay for invoices, the payment is recorded as an expense in their income statement. Similarly, some also wonder, “Is accounts payable a revenue or expense?” It is neither; accounts payable is a liability, while only the settlement of those payables affects the expense side of the income statement.
Let us say, ABC Enterprises purchases goods on credit worth Rs. 1 lakh from a vendor, the company’s Accounts Payable balance will increase by this amount as it is a purchase on credit and the amount is owed to the vendor. The enterprise has not yet incurred an expense. This often leads to one of the top queries people have: “Is accounts payable an expense or a liability?”
The correct answer is that accounts payable represents a liability, not an expense—this is a common point of confusion in the liability vs expense discussion. It will be considered an expense once the company pays off the amount and reduces the Accounts Payable balance by Rs. 1 lakh, at which point it shows up as an expense in the books. That’s why many also ask, “Is accounts payable an expense on the income statement?” The answer is no—it appears on the balance sheet as a liability until payment is made. These clarifications help address frequent impressions and questions around the position of accounts payable in financial statements.
Is Accounts Payable an Expense or Liability?
Accounts payable is a liability for a business, not an expense. Many people often ask, “Is accounts payable an expense or a liability?” In the liability vs expense discussion, the clear answer is that accounts payable is a liability, since it represents money owed to vendors rather than an immediate cost. To clarify further, “Is accounts payable an expense on the income statement?” The answer is no—it is recorded on the balance sheet as a liability until payment is made.
It is necessary to maintain the AP function efficiently for favorable cash flow and effective budgeting with a clear insight into payables. An experienced business process outsourcing (BPO) partner can help companies boost the efficiency and productivity of their AP function. They can offer high accuracy in invoice processing and data entry for better efficiency. Reach out to ARDEM for more information.
References:
https://www.investopedia.com/ask/answers/030515/are-accounts-payable-expense.asp