Accounts payable is a bookkeeping term that refers to the money you owe to private vendors, such as suppliers. On a financial statement, accounts payable appears on the debit portion of your balance sheet. It represents a sum that you don't actually own because you will soon have to pay it.
Financial statements are collections of data that provide a comprehensive picture of the financial health of your business. It is a good idea for your company to prepare financial statements annually. The process provides you with an opportunity to catch up on your bookkeeping and assemble your financial information in a form that stays consistent year after year, giving you a clear basis for comparison.
Balance sheets provide an essential puzzle piece in your financial statement. Your balance sheet is a snapshot of your financial situation, enabling you to easily compare your assets and liabilities. Your balance sheet provides a necessary perspective on your income statement. It tells whether you have been making a profit but not whether you have been allocating the funds you earn in constructive ways that add to your net worth.
Liabilities, Assets and Net Worth
Your balance consists of a section for listing your assets, another section for listing your liabilities and a format for calculating your net worth, by subtracting liabilities from assets. Assets include cash on hand, equipment, inventory, business property and accounts receivable, or money that is owed to you. Liabilities include credit card, business and personal debt, mortgage debt, unpaid balances on equipment and accounts payable.
Accounts Payable as a Liability
Accounts payable is listed as a liability on your balance sheet because it quantifies the shortfall separating supplies and inventory that you have listed as assets and the honest, sustainable financial situation of fully owning these items. If you have not yet paid for stock you have on hand, it does not increase your net worth. Listing accounts payable as a liability corrects the potentially erroneous perception that could occur if you treat unpaid inventory as an asset without qualifying this entry.