Accounts payable is a liability, not an expense. The two represent related but ultimately different concepts. The balance of accounts payable is commonly included in total expenses when reviewing a company’s financial statements. The best way to understand how to distinguish between liabilities and expenses is by analyzing past versus future actions; liabilities are those obligations that are yet unpaid, while expenses are obligations that have already been paid in an effort to generate revenue.
Liability Account Vs. Expense Account
Liability and expense accounts both appear on financial statements. Liabilities are covered on the balance sheet, which shows a snapshot of a company’s financial standing for a specific date. Expenses show up on the income statement. The income statement itemizes revenues and expenses to show net income for a period of time.
An example of an expense transaction would be any cost that might be incurred while a salesperson is trying to bring in revenue. Lodging, client dinners, transportation and materials for presentations are all added to the expense account.
Liability accounts are any costs incurred that haven’t yet been paid. These include interest owed on loans from creditors (interest payable) and taxes that have built up that the company expects to have to pay (taxes payable).
Accounts payable involves any money owed to creditors that will come due in a short period of time – usually less than 30 days – that doesn’t involve a promissory note. A mortgage obligation wouldn’t be added to accounts payable because it came with a promissory note; mortgage obligations fall under notes payable.