Whenever you buy goods on credit without paying cash up front, you have created an “Accounts Payable.” A common scenario is when you purchase materials from a supplier and the invoice needs to be paid back in 30 days. Accounts payable are liabilities to your business and are recorded as current or short-term liabilities on the balance sheet. Accounts payable must be settled relatively quickly to avoid default.
TL;DR (Too Long; Didn't Read)
To calculate accounts payable on your balance sheet, add up the totals of all the invoices you have approved but not yet paid.
What Is Included in Accounts Payable?
Accounts payable covers any bill amounts you have accrued and will need to pay soon. These include shipments with terms from suppliers and current utility statements. It does not include long-term debt such as term loans and credit card balances. If you pay an accounts payable item with a credit card, the sum becomes part of your long-term debt rather than part of accounts payable. The total amount of your liabilities won't change this payment because you will have transferred debt from one type of liability to another. However, you will have decreased the amount you owe as accounts payable.
How to Calculate Accounts Payable
If your enter bills and schedule payments using a computerized accounting system such as QuickBooks, you can calculate accounts payable by running a report that summarizes the bills you've entered but not yet paid. But you don't need an accounting program to calculate accounts payable. Keep your bills together, whether you receive them as emails or snail mail. Add the amounts of all of the bills in your inbox or physical file to find your accounts payable balance. Also, include any other sums you've accrued that won't be included in your digital or paper bills. For example, if your employees have worked hours for which they haven't yet been paid, include these amounts in your accounts payable balance, unless you use a separate entry for payroll liabilities.
How Accounts Payable Affects Your Balance Sheet
Like any other liability, accounts payable affect your balance sheet by offsetting your assets to determine your total net worth. If you bought materials and used them in items you've already sold, you've already spent this money and used the products or services you bought with it, even if you haven't yet paid the bill.
You still have the money you need to pay the bill and it's included in your assets, but in essence, the funds have already been spent, so they're also included as liabilities. If you've bought the items but haven't yet used them, you'll also enter them back in as part of the inventory sum in the assets column. The process of making all these entries may seem unnecessarily tedious, but it yields accurate information about your company's net worth and also gives you a useful picture of how your assets and liabilities are distributed.
Devra Gartenstein founded her first food business in 1987. In 2013 she transformed her most recent venture, a farmers market concession and catering company, into a worker-owned cooperative. She does one-on-one mentoring and consulting focused on entrepreneurship and practical business skills.