What Is a Payable? Definition, Categories, and Life Cycle

What is a Payable

A payable represents an amount a business owes to another party for goods or services it has received. This financial obligation is a common part of business operations, reflecting a company’s promise to make a future payment. They are recorded in a company’s financial records as liabilities, indicating a future outflow of economic benefits.

Understanding What a Payable Represents

A payable is recognized as a liability on a company’s balance sheet because it signifies a present obligation arising from past transactions or events. This obligation requires a future transfer of economic resources, typically cash, to settle the debt. The amount owed is usually certain or can be reasonably estimated.

Payables are classified based on when they are due to be settled. Current payables, also known as current liabilities, are financial obligations expected to be paid within one year or within the company’s normal operating cycle, whichever is longer. In contrast, non-current payables, or long-term liabilities, are debts due beyond one year. This distinction is important for assessing a company’s short-term liquidity and overall financial health.

Common Categories of Payables

Accounts payable (AP) is the most common type, representing money owed by a business to its suppliers for goods and services purchased on credit. These amounts are typically due within a short period, often 30 to 90 days. Accounts payable are a form of short-term credit offered by suppliers, allowing companies to defer payments.

Notes payable are more formal obligations, evidenced by a written promissory note. These involve a borrower’s promise to repay a specific amount to a lender, usually with interest, over a predetermined period. Unlike accounts payable, notes payable typically involve formal loan agreements with specific terms like interest rates.

Accrued expenses, also known as accrued liabilities, are expenses that a company has incurred but has not yet paid or received an invoice for. These expenses are recognized in the accounting period in which they are incurred, even if the cash payment occurs later. Common examples include accrued salaries, utilities, interest payments, or taxes that have accumulated but are not yet due for payment.

Unearned revenue, sometimes called deferred revenue, is another type of liability. This arises when a company receives payment from a customer for goods or services that have not yet been delivered or performed. Because the company has an obligation to provide the product or service in the future, the upfront payment is recorded as a liability until the earning process is complete.

The Life Cycle of a Payable

The life cycle of a payable begins with its incurrence, when a business receives goods or services on credit. This involves receiving an invoice from a vendor, outlining the details of the purchase and the payment terms. The invoice serves as a formal request for payment and marks the start of the accounts payable process.

Once incurred, the payable is recorded in the company’s financial records, usually in an accounts payable ledger. This recording is a crucial step for tracking obligations and ensuring proper financial management. It involves entering the transaction into the accounting system, often by matching the invoice with a purchase order and receiving report to verify accuracy.

The final stage of the payable life cycle is payment or settlement. This involves paying the outstanding amount to the vendor, which extinguishes the liability. Payment is typically scheduled according to the agreed-upon terms, such as Net 30 or Net 60. Effective management of this entire cycle, from incurrence to settlement, is essential for maintaining healthy cash flow and strong relationships with suppliers.