Accounts payable (AP) are obligations to suppliers for goods or services received under the applicable contractual terms. An accrued liability records an incurred obligation whose invoice, payroll processing or payment remains outstanding at the reporting date.
Under U.S. generally accepted accounting principles (GAAP), ordinary short-term accounts payable generally equal the amount owed under the purchase terms. Cutoff assigns transactions to the period when recognition conditions occur, rather than automatically following invoice or payment dates.
Accounts payable calculations begin with recognized purchases, then incorporate contractual discounts, accepted returns, allowances and payments under the stated accounting method. A purchase order alone generally creates no recognized trade payable before the supplier performs.
Retainage is an earned amount temporarily withheld from payment under a contract, often pending final acceptance or completion. Accounts payable include that amount when the related goods or services qualify for recognition and the purchaser has incurred the obligation.
For example, accepted construction work of $40,000 with 10% withheld produces a $40,000 obligation, although only $36,000 is currently billable.
Common mistakes
- Invoice-date cutoff. Alder's January-dated $8,000 invoice still belongs to December under its shipment-transfer terms.
- Balance versus adjustment. Merrow's $12,000 bonus adjustment produces a $30,000 liability; it is not the ending liability itself.
- Net wages as expense. Merrow's $7,200 net wages exclude $1,800 withheld from employees' $9,000 gross compensation.
Bottom line
- Accounts payable follow contractual receipt or transfer conditions and include earned retainage, regardless of invoice arrival or current billing.
- Closing adjustments equal supported required liabilities less existing recorded balances; employee withholdings divide gross wages, while employer payroll taxes add expense.
- Vacation accrual requires prior service, vesting or accumulation, probable payment and reasonable estimation; qualifying nonvesting accumulating sick pay has an accrual exception.
- Bonuses follow the agreement's actual profit base, and self-insurance liabilities include qualifying incurred claims rather than reserves for future events.
Exam shortcut
The preparer identifies the reporting date and the event creating each obligation: transfer, completed service, declaration, incurred claim, communication or effective cancellation. Columns labeled “required balance” and “already recorded” separate the closing balance from its adjustment after service periods, bonus wording and payments are resolved. Retirement schedules retain each layer's original rate and calculate accretion before applying end-of-period revisions.
The full lesson (about 7,794 words, 52 min read) adds 5 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- II.G1
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