Payable (Accounting)

A payable is an amount that a business owes to another party as of the balance sheet date, recorded as a liability until it is settled. The word is used on its own as shorthand for any such obligation, and it forms part of the name of many liability accounts, including Accounts Payable, Notes Payable, Wages Payable and Interest Payable. Each one records a present obligation that arose from a past transaction and will normally be paid in cash.

Payables are the mirror image of receivables: one company's payable is its supplier's or lender's receivable. Under accrual accounting, a payable is recorded when the obligation arises rather than when cash leaves the bank, which is why payables are central to matching expenses with the period in which they are incurred. On a classified balance sheet, payables due within a year are reported among current liabilities.

A payable is an IOU that a business has written and not yet settled. When a café takes a delivery of coffee beans and is told it can pay in 30 days, it has the beans today and owes the money later. Until it pays, that unpaid amount is a payable.

Keeping track of payables is like keeping a list on the fridge of every bill that has arrived but has not yet been paid. The list shows how much of the money in the bank is already spoken for. A business that ignores the list can easily think it has more spare cash than it really does, and then struggle when several bills fall due in the same week.

• Accounts payable. Amounts owed to suppliers for goods and services bought on credit, usually supported by an invoice and due within 30 to 60 days.
• Notes payable. Obligations backed by a signed promissory note, which normally carry interest and may run for several years. See notes payable.
• Wages and salaries payable. Pay that employees have earned but not yet received at the end of the period, recorded as wages payable.
• Interest payable. Interest that has built up on borrowings since the last payment date, recorded as interest payable.
• Taxes payable. Income, sales and payroll taxes that are owed to government agencies but not yet remitted, shown as taxes payable.
• Dividends payable. Dividends the board has declared but the company has not yet paid, recorded as dividends payable.

Liabilities carry a normal credit balance, so a payable is increased with a credit and reduced with a debit. Suppose a retailer that uses a perpetual inventory system buys $8,000 of merchandise on March 10 on terms of net 30. It debits Inventory $8,000 and credits Accounts Payable $8,000. On its March 31 balance sheet, the $8,000 appears as a current liability. When it pays the supplier on April 9, it debits Accounts Payable $8,000 and credits Cash $8,000, which brings the supplier's balance back to zero.

Some payables are recorded without any bill from the other party. If employees have earned $3,500 for the last three working days of March but will not be paid until April 3, the company makes one of its month-end adjusting entries: a debit to Salaries Expense of $3,500 and a credit to Salaries Payable of $3,500. The expense then lands in March, the month in which the work was done.

Paying suppliers on the due date, rather than early, lets a business use their credit as short-term, interest-free financing. Treasurers track this with days payable outstanding, calculated as:

A company with average accounts payable of $40,000 and annual cost of goods sold of $400,000 has a DPO of 36.5 days. A longer DPO shortens the cash conversion cycle, but stretching suppliers too far damages relationships and gives up offers such as an early payment discount on terms of 2/10, net 30.

Because every payable eventually becomes a cash payment, the payables process is a common target for error and fraud. Most businesses match the purchase order, the receiving report and the supplier's invoice before approving payment, a check known as the three-way match. Separation of duties keeps the person who sets up new suppliers away from the person who releases payments. At year-end, auditors also search for unrecorded liabilities by reviewing payments made shortly after the balance sheet date, since leaving out a payable understates both liabilities and expenses.

• Financial Accounting Standards Board