Accounting has specific groups and names for business transactions. The separation of these items allow for a better understanding of a company’s financial health. Accounts payable is both a group for transactions and a specific type of transaction. In most cases, accounts payable are the result of purchasing goods or services on credit from vendors and suppliers.
Accounts Payable Defined
Accounts payable is a liability in accounting terms. The information reported represents claims against the company’s assets, primarily cash. Accrual-based accounting methods use accounts payable to define transactions where the company still owes money to another business. As a liability, accountants list accounts payable on the balance sheet.
Journal Entry Examples
Let's say a company purchases $500 of office supplies on account. The company’s accounting department will debit office supplies expense for $500 and credit accounts payable for $500. The accounts payable account is specific to the vendor that will eventually receive the money. To record payment, accountants debit accounts payable for $500 and credit cash for $500. This removes the entry from the company’s books.
Assets represent items owned by a business. A company can purchase assets using accounts payable. Using the previous example, accountants would debit an asset account rather than an expense account in the first entry. Stockholder’s equity includes investments made by individuals or financial institutions. Common and preferred stock purchases define these transactions. Treasury stock — stock held by the company — can also fall under the stockholder’s equity.
The second section on the balance sheet contains all liabilities for a company. Accounts payable is a current liability, meaning the company expects to pay off open balances within 12 months. While the company’s entire accounts payable may not go away, companies constantly pay off individual accounts and incur new liabilities. A correlation is often possible between current assets and current liabilities listed on the balance sheet.