What Is Payable in Accounting? Definition & Types

Understanding financial obligations is essential for comprehending a business’s financial standing. In accounting, “payables” are commitments representing amounts a company owes to other parties. These obligations arise from routine operations, reflecting goods or services received for which payment has not yet been made. Understanding payables is important for assessing a company’s financial health and its ability to manage commitments.

Defining Payables in Accounting

Payables in accounting refer to liabilities, which are obligations to transfer economic benefits to another entity in the future. These financial commitments arise when a business receives goods or services on credit, incurring an expense or acquiring an asset without immediate payment. Payables result from the accrual accounting method, where transactions are recorded when they occur, regardless of when cash changes hands. This ensures financial statements accurately reflect a business’s economic activities.

Payables are classified as short-term or long-term based on their due date. Obligations due within one year or the company’s normal operating cycle, whichever is longer, are current liabilities. Those due beyond that timeframe are long-term liabilities. The management of payables indicates a company’s financial position and its ability to meet future financial demands.

Key Categories of Payables

Several distinct types of payables exist, each arising from different business activities and carrying specific implications for financial reporting. Understanding these categories provides a comprehensive view of a company’s obligations.

Accounts Payable

Accounts payable (AP) represents short-term debts a business owes to its suppliers for goods or services purchased on credit. These obligations arise from routine operational purchases, such such as inventory, raw materials, or office supplies. An accounts payable is created when a business receives an invoice from a supplier for items already delivered. These are unsecured and non-interest-bearing, with payment expected within a short period, often 30 to 90 days, as per agreed-upon credit terms.

Notes Payable

Notes payable are more formal debt instruments than accounts payable, representing a written promise to repay a specific amount to a lender by a set date, usually with interest. These obligations arise from borrowing money from banks, financial institutions, or individuals, formalized by a promissory note. The promissory note outlines specific terms, including the principal amount, interest rate, and repayment schedule. Notes payable can be short-term or long-term liabilities, depending on whether repayment is due within one year or beyond.

Accrued Expenses/Liabilities

Accrued expenses, also known as accrued liabilities, are costs a business has incurred but not yet paid or received an invoice for. These expenses are recognized in the accounting period they are incurred. Common examples include salaries payable, interest payable, and utilities payable. For instance, if employees work in the last week of a month but are paid in the following month, their salaries are recorded as an accrued expense. Accrued expenses reflect an obligation for future cash payments and are presented as current liabilities on the balance sheet.

Unearned Revenue (Deferred Revenue)

Unearned revenue, also referred to as deferred revenue, represents money received by a company for goods or services not yet delivered or performed. This payable arises when customers pay in advance for subscriptions, services, or products to be provided in the future. Until the goods or services are delivered, the company has an obligation to the customer, making unearned revenue a liability on the balance sheet. As the company fulfills its obligation, the unearned revenue is recognized as earned revenue on the income statement.

Taxes Payable

Taxes payable are amounts a business owes to government entities for various taxes incurred but not yet remitted. These obligations are classified as current liabilities because they are due within a short period. Examples include sales tax payable, payroll tax payable, and income tax payable.

Sales tax payable arises when a business collects sales tax from customers, which must then be paid to the relevant tax authorities. Payroll taxes payable include amounts withheld from employee wages and the employer’s portion of payroll taxes. Income tax payable represents the estimated income tax liability a company owes based on its profitability.

Recording and Financial Statement Impact

Payables are recognized and presented in a company’s financial records using the accrual accounting method. This method dictates that expenses are recorded when incurred, regardless of when cash is paid. This ensures financial statements provide a comprehensive picture of a company’s economic performance and financial position.

When a payable is created, it increases a liability account on the balance sheet. For instance, purchasing supplies on credit recognizes an expense and records an accounts payable liability. As the payable is settled through payment, the liability decreases, and cash is reduced. The balance sheet reports payables as liabilities, distinguishing between current and long-term liabilities.

Changes in payables also influence a company’s cash flow statement, specifically within the operating activities section. An increase in payables indicates a company incurred expenses but has not yet paid cash, which increases cash flow from operations. Conversely, a decrease in payables suggests the company is paying off obligations, reducing cash flow from operations. This impact provides insights into how a company manages its working capital and liquidity.

The Lifecycle of a Payable

The lifecycle of a payable begins with the event that creates the obligation, typically the receipt of goods or services. For example, when a company orders office supplies and receives them with an invoice, an accounts payable is established. This invoice serves as a formal request for payment and specifies payment terms, such as “Net 30,” meaning the full amount is due within 30 days from the invoice date. Some suppliers may offer discount terms, such as “2/10, Net 30,” allowing a 2% discount if payment is made within 10 days, otherwise the full amount is due in 30 days.

After the invoice is received, it undergoes an internal verification process to ensure goods or services were received as ordered and are of acceptable quality. Once approved, the payable is scheduled for payment according to the agreed-upon terms. This involves preparing the payment, whether by check, electronic funds transfer, or other methods. Upon payment, the liability is extinguished, reducing both the payable account and the company’s cash balance. This cycle ensures obligations are tracked from inception to settlement, providing a clear record of financial commitments.