Most people feel confused in answering whether an account payable is a current or long-term liability.
The answer to this question is that there are two types of liabilities that appear on the company’s balance sheet, one is current and the other is long-term.
Account payable comes under current liability as this is the amount of money or debt owed to suppliers and creditors of the company payable within one year.
Account payable is a ledger account, used to gather all the amounts which are payable within one year by the company. Accounts payable arises when the company purchases goods or services on credit for a shorter period of time usually 30, 60, or 90 days.
These qualities make accounts payable a current liability that appears under the current liability section in the balance sheet.
Account payable shouldn’t be confused with the term accounts receivables. Both come under the balance sheet’s current section but are different in nature.
An account receivable is an asset account while an account payable is a liability account. Account receivables are the amount of money owed to the company from its customers.
They are then converted into cash when the customers pay for the services or goods previously provided by the company.
Difference Between Account Payable and Long-term Liability:
The main difference between the account payable and long-term liability is the amount of time allowed to clear the balance by the company.
Normally the payment period of account payable ranges from one day to one year while the payback period of long-term liabilities is greater than one year.
In the balance sheet, the amount of account payable comes under the heading of current liabilities along with short-term notes payable and the current portion of long-term liabilities.
The long-term debts or liabilities generally have their own heading in the balance, including mortgage notes, long-term debts, etc.
For more clarification, let’s study the following example
Example:
Kolson company started its business in January 2019. During the month they occur the following transactions.
- Purchased goods on credit from Karleez amounting to $25,000 on 90 days credit.
- The company purchases raw material inventory from Ali baba store amounting to $10,000 on 30 days’ credit.
- The company borrowed 10 years’ loan from the bank amounting to $200,000.
- Utility bills for the month of January amounted to $10,000 which are due on Feb 2.
Requirement:
The company’s management asks you to give an expert opinion on the nature of the above transactions.
Solution:
- The amount of $25,000 should be included in the company’s account payable ledger as the amount is due to the next 90 days.
- The amount of $10,000 should be included in the account payable as the amount is payable into the next 330 days.
- The $200,000 should be included under the head of long debt as the payback period is greater than one year.
- Utility bills will come under the head of current liability.
