Definition
In accounting, a “payable” refers to the amount a company owes to suppliers or creditors for goods or services received but not yet paid for. These obligations typically arise from normal business operations and can encompass a variety of debts:
- Accounts Payable (AP): Amounts owed to suppliers for goods and services purchased on credit. This is a short-term liability found on the balance sheet.
- Bank Loans Payable: Amounts due to banking institutions, typically categorized as either short-term or long-term liabilities depending on the repayment period.
Examples
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Accounts Payable Example: Company A purchases $5,000 worth of office supplies from Vendor B. However, it agrees to pay the invoice in 30 days. Until the payment is made, the amount is recorded in Company A’s accounts payable.
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Bank Loans Payable Example: Company C takes out a $100,000 loan from a bank, repayable over 5 years. The outstanding loan balance gets categorized under bank loans payable, reflecting a long-term liability.
Frequently Asked Questions (FAQs)
Q1: What is the difference between accounts payable and loans payable?
A1: Accounts payable refers to short-term obligations to suppliers for purchasings made on credit, whereas loans payable includes both short-term and long-term financial obligations to lenders such as banks.
Q2: Are payables considered assets?
A2: No, payables are considered liabilities because they represent the company’s obligation to pay debts.
Q3: How are payables recorded in financial statements?
A3: Payables are recorded on the balance sheet under the ‘current liabilities’ section for short-term payables (due within one year) and under the ’long-term liabilities’ for obligations beyond one year.
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Accounts Receivable (AR): Amounts due to a company from its customers for goods or services delivered but not yet paid for. These are considered assets.
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Accrued Expenses: Expenses that have been incurred but not yet paid or recorded, similar to accounts payable but for services or goods received rather than bought on credit.
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Liabilities: The financial obligations of a business, including payables, accrued expenses, and loans.
Online References
Suggested Books for Further Studies
- Intermediate Accounting by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield.
- Financial Accounting by Robert Libby, Patricia Libby, and Frank Hodge.
- Accounting Made Simple: Accounting Explained in 100 Pages or Less by Mike Piper.
Fundamentals of Payable: Accounting Basics Quiz
### What are accounts payable?
- [ ] Amounts due from customers for goods delivered.
- [ ] Long-term liabilities on the balance sheet.
- [x] Amounts owed to suppliers for goods and services purchased on credit.
- [ ] Company profits that are not yet recorded.
> **Explanation:** Accounts payable represent amounts owed by a company to its suppliers for goods and services that have been purchased on credit.
### Is accounts payable considered an asset or a liability?
- [ ] Asset
- [x] Liability
- [ ] Equity
- [ ] Revenue
> **Explanation:** Accounts payable is considered a liability because it represents the company's obligation to pay off debts to suppliers or creditors.
### Where are accounts payable listed on the balance sheet?
- [x] Under current liabilities.
- [ ] Under current assets.
- [ ] Under shareholders' equity.
- [ ] Under non-current assets.
> **Explanation:** Accounts payable are listed under current liabilities on the balance sheet as they are typically due within one year.
### What impacts the accounts payable balance?
- [ ] Recording sales revenue.
- [x] Receiving goods from suppliers on credit.
- [ ] Paying off loans.
- [ ] Depreciation of assets.
> **Explanation:** The accounts payable balance increases when a company receives goods or services from suppliers on credit terms.
### What is a common characteristic of accounts payable?
- [ ] They always have interest costs.
- [ ] They are related to loans from banks.
- [x] They reflect short-term obligations.
- [ ] They reduce the company's liabilities.
> **Explanation:** Accounts payable typically reflect short-term obligations that are expected to be paid within a year.
### How are accounts payable usually settled?
- [ ] By issuing stock.
- [x] By making payments to suppliers.
- [ ] By borrowing funds.
- [ ] By selling assets.
> **Explanation:** Accounts payable are usually settled by making payments to suppliers for the goods and services received.
### What type of account is 'bank loans payable'?
- [ ] Revenue account
- [ ] Equity account
- [ ] Current asset account
- [x] Liability account
> **Explanation:** Bank loans payable are categorized as a liability account as they represent future obligations to pay back borrowed funds.
### How does recording an accounts payable entry affect the financial statements?
- [x] Increases liabilities and decreases equity.
- [ ] Decreases assets and increases revenue.
- [ ] Increases assets and decreases liabilities.
- [ ] Decreases liabilities and increases expenses.
> **Explanation:** Recording an accounts payable entry increases liabilities and does not immediately affect equity until payment is made.
### Which of the following is correct regarding accounts payable turnover ratio?
- [ ] It measures how quickly a company collects payments from its customers.
- [ ] It computes the average number of days payables are outstanding.
- [x] It indicates how quickly a company pays off its suppliers.
- [ ] It represents the interest rate on bank loans.
> **Explanation:** The accounts payable turnover ratio indicates how quickly a company is paying off its suppliers.
### What could happen if a company delays payment of its accounts payable?
- [ ] Improved supplier relationships.
- [x] Goods and services being cut off by suppliers.
- [ ] Decreased costs of supplies.
- [ ] Reduction in tax liabilities.
> **Explanation:** If a company delays payment of its accounts payable, suppliers may cut off goods and services, which can disrupt business operations.
Thank you for exploring the comprehensive understanding of “payable” and practicing the related quiz questions. Continue enhancing your knowledge in financial management!
