How are accounts payable shown on a balance sheet? With examples

Your company’s balance sheet is a vital resource. It provides valuable insight into your business’s financial health so you can track progress toward your goals and hone your strategy.

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Your balance sheet is essentially a snapshot of your company’s financial position. It details three things:

1. Your assets (what you own)
2. Your liabilities (what you owe)
3. Your equity (the inherent value in your business)

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Accounts payable (AP) is an important part of the liabilities section of your balance sheet. But before we dig into AP’s role, we need to understand how balance sheets work.

Understanding how balance sheets work

Your balance sheet is one of the three key reports that all business owners need to understand. Together with your income statement and cash flow statement, your balance sheet reveals information about your business’s financial health and performance.

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Your balance sheet is a snapshot of your financial health. It’s like a financial report card that shows how your business is doing on that particular day, at that particular point in time. 

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Balance sheets follow a specific formula that you’ll understand if you’re familiar with double-entry accounting:

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Assets = Liabilities + Owner’s Equity

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All your assets combined should equal the sum of your liabilities and owner’s equity. Another way to think about it is that the value of your business—or equity—is what remains after you subtract everything you owe from everything you own.

What is accounts payable on a balance sheet?

Accounts payable, similar to trade payables, typically sits in the current liabilities or short-term liabilities section of your balance sheet, near the top of the liabilities section of the report. It shows the money you owe to suppliers, vendors, and other third parties. 

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Because most third parties have payment terms that are net 90 or sooner, most companies can expect to turn over, or pay off, their entire AP balance within 90 days. 

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That said, your accounts payable balance is a rotating account. As you make payments to vendors, your AP balance will shrink. But simultaneously, as vendors bill you for goods and services, your AP balance will grow. 

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That’s why a “snapshot” is a good way to think about AP—and all balance sheet accounts, for that matter. It gives you information about those account balances at that specific point in time, but your balances could look completely different the next week, the next day, or even the next hour.

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Accounts payable is not an income statement account. It shows only what you owe; it doesn’t tell you anything about income you earned or expenses you incurred.

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Similarly, AP is not part of your cash flow statement. Your cash flow statement reflects all cash activity, and your AP balance doesn’t directly show a cash impact. Yes, your AP balance may have a secondary impact on working capital when you make payments to vendors, but the balance itself won’t affect that report.

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So how and when do you record AP on the balance sheet?

How to record accounts payable

Anytime you receive an invoice from a vendor or supplier, you should debit an expense account and credit accounts payable. This will increase your AP balance. 

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Anytime you make a payment to a vendor or supplier, you should reverse your AP entry by debiting your AP balance and crediting cash. This will decrease your AP balance. 

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You’d also need to make a journal entry to accounts payable when:

• Your supplier voids an invoice
• Your supplier adjusts an invoice
• You return damaged inventory

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When recording journal entries to AP, here are a few best practices to think about:

• Know if your entry increases or decreases AP: A debit to AP decreases your balance and a credit increases it.
• Pay attention to the opposing entry: In double-entry accounting, your journal entry should hit at least two accounts. When recording an entry to AP, know what the other side of the journal entry should be.
• Automate when possible: Your AP workflow can easily be automated. If your software doesn’t offer automation, consider adopting software that does.

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Once you’ve recorded entries to AP, your job isn’t done. To ensure your balance sheet is correct, you should reconcile your account. 

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You reconcile accounts payable by comparing statements and reports (like purchase orders and vendor invoices) to what’s listed in your AP ledger, and then sort out any discrepancies you find. Just like with the journal entries themselves, automation software can make reconciliation a breeze.

Examples of accounts payable on a balance sheet

Accounts payable is a short-term liability, which means it belongs at the top of the “Liabilities & Owner’s Equity” section of your company’s balance sheet. Let’s look at a sample balance sheet.

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As you can see, the “Current Liabilities” section contains accounts payable along with other liabilities that will come due within one year, like short-term loans, the current portion of long-term loans, etc.

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You won’t see AP in the long-term liabilities section because your AP account generally only tracks what you owe within the next few weeks or months.

How AP automation can make recording AP easier

Recording AP manually is time consuming and prone to errors. Accounts payable automation can streamline the process and solve both of those problems. 

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Ramp Bill Pay automates your entire accounts payable workflow, beginning from when you receive an invoice through approvals, payments, and reconciliation. 

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Here’s what you can expect when you use Ramp to automate your AP process:

• Automated invoice processing: With Ramp, you can import bills right from your ERP and select a payment method, saving your team the time of entering the details manually
• Improved accuracy: Ramp catches and flags errors that can be easily overlooked in manual accounts payable processes, such as duplicate invoices. Ramp even notices and corrects empty fields, like using a bill’s payment terms to fill in a missing due date and prevent late payment. 
• Customizable approval workflows: No more confusion around who’s next in the  approval chain. Ramp lets you create custom approval workflows that automatically route the bill where it needs to go next.

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Watch a demo to learn more about how automating your accounts payable process with Ramp can save your company time and money.