In accounting, an account payable is a sum of money owed by one party to another. The person or company that owes the money is sometimes called the debtor, while the person or company to whom the money was lent is sometimes called the creditor.
A record of a payment of an account payable consists of debiting cash and crediting accounts payable in accounting entries. Alternatively, it may consist of debiting accounts receivable and crediting cash/accounts payable in financial statements. There are two general types: current and long-term. Current liabilities are liabilities that will be due within one year from today’s date; long-term liabilities are those which will not be due for more than one year from today’s date.
In the United States, the International Financial Reporting Standards (IFRS) standard requires accounts payable to be classified as either current or long-term. In Australia, the Australian Accounting Standards Board (AASB) standard does not specify which type should be classified as current or long-term, however it recommends that such information should be presented in a way that promotes comparison with similar assets and liabilities. Thus, it is common for account payable to be defined as “Accounts Payable Current” in some jurisdictions but “Accounts Payable Long-Term” in other jurisdictions.
Accounts payable usually includes all of a company’s unpaid debts. By contrast, a creditor’s obligation is limited to the amount owed for the time being. In American English, the term “accounts payable” is often preceded by “current” or “on demand”, which indicates that the debt is due from the company within one year. For example, an account payable that is due on 1 January would be described as “due on demand”.
Accounts payable can differ from another type of current liabilities called short-term debt. Short-term debt, also known as current maturities of long-term debt, are debts that are due within a year or two (for example, one to three years). Short-term debt is sometimes called current liabilities. While the cash generated from credit sales to customers typically forms the basis of accounts payable, short-term debt is secured by accounts receivable as collateral.
Uncollectibles, or bad debts, are portions of accounts payable that will not be recovered. They are a separate expense on the income statement in addition to interest on late fees charged on remaining balances. Bad debt expense is calculated using an aging schedule which tracks receivables by their age relative to their due dates. An example of an aging schedule can be found under “The Aging Schedule” reference below in the “See also” section.
A typical company will have current and long-term liabilities. Current liabilities are due within one year; long-term liabilities are due beyond one year. The process of accounting for current and long-term liabilities is discussed in the section below.
In balance sheet accounting, the term “current” means due during the accounting period in which a balance sheet is constructed (i.e., within 12 months). The term “noncurrent” means subsequent to 12 months and may be stated in terms of years (e.g., subsequent to one year).
In balance sheet accounting, the term “long-term” means beyond the accounting period in which the balance sheet is constructed (i.e., more than one year). The term “short-term debt” means debt that is due within one year. It may be stated in terms of months (e.g., 1 month) or weeks (e.g., seven weeks).
In accounts payable systems, “current” and “noncurrent” are not distinguished at all when dealing with accounts payable based on type of debt. These are only two aspects of the total accounts payable financing. Accounting entries are made for the dates that the debt becomes due, regardless of which type of debt is going to be presented (current or long-term). The next information discussed below is about classifications for account types other than cash and long-term.
Collection and recording of accounts payable transactions requires that judgment be made as to whether an account is current or non-current. Such judgments are often based on some experience with previous transactions:
Accounts Payable Current:
This includes amounts due within one year. The most common method for recording this entry is to debit Cash and credit Accounts Payable Account.
Accounts Payable Long-Term:
This includes amounts due beyond one year. The most common method for recording this entry is to debit Accounts Receivable and credit Cash/Accounts Payable Account.
Current Legal and Other Liabilities:
This includes accounts payable that are held on behalf of other entities (e.g., a parent company), where payment is due within one year. Typically, this type of liability has no existing balance on the books in question, so a debit entry is made to this account as well. Since there may be no prior balance, the amount due must be determined based on estimated future earnings or revenues collected from customers accepting or initiating credit sales with the vendor.
