By keeping track of your accounts payable expenses, you'll also keep tabs on your company's overall cash flow. The following are some of the most common accounts payable examples. The better you can manage these overhead expenses, the more you'll understand your company's financial health.
What are some examples of accounts payables?
Accounts payable refers to any money owed to another company. Accounts payable (AP) refers to purchases you've completed or still need to pay. These purchases can include any goods or services purchased from a supplier, vendor, or contractor. Common examples of accounts payable items include:
- Business purchases
- Purchases made from a supplier on credit
- Subscription or installment payments that you owe after receiving goods or services
You'll find your accounts payables listed on your company's balance sheet under current liabilities. In fact, some accounting professionals even refer to these costs as the "current liability account."
Your accounts payables will also appear on your cash flow statement under "operating activities." Every business owner needs to keep a close eye on these business expenses.
Keeping close track of the accounts payable process will provide you with the following benefits:
- You'll have a full understanding of your company's cash flow
- You can prepare accurate financial statements
- You can stagger the way you pay invoices to optimize your cash flow
- You can negotiate with vendors to reduce your overhead costs
Accounts payable examples
What are the most common expenses that your accounts payable department handles for your business? The following are broad categories of accounts payable costs, with specific examples under each category.
Raw material purchases
A common accounts payable example includes the cost of buying raw materials. For business owners, this refers to the money your company owes for the materials you use to create your products. The exact type of raw materials that appear on your balance sheet may vary by your industry and even your business model.
Here are some of the most common raw material needs, organized according to various industries:
- Clothing and textiles companies: cotton, wool, synthetic fibers, fasteners, and thread
- Construction companies: lumber, steel, cement, fittings, nails, industrial materials, and chemicals
- Food and beverage companies: grains, fruits, vegetables, meat, spices, and dairy products
- Manufacturing companies: steel, wood, oil, plastic, and chemicals
- Cosmetics companies: chemicals, pigments, and dyes
- Energy companies: crude oil, natural gas, coal, and uranium
Naturally, only some businesses will require the purchase of raw materials. However, these will be essential business transactions for companies that manufacture their own goods or use raw materials as part of their services. For example, if your business produces consumable goods, your accounts payable process will include these sorts of raw starting materials.
Transportation and logistics
Maintaining an efficient supply chain is the top priority for many business owners. Transportation and logistics costs can be broken into two general categories: B2B transportation costs (getting the item to your business or retail location) and B2C transportation costs (getting the item to the final consumer).
A typical business might include the following B2B costs in its general ledger:
- Cost of delivering goods to their business or warehouse
- Storage and warehousing fees
- Inventory management expenses
- Logistics software
- Labor costs
- Refrigeration costs for handling perishable goods
Accounts payable entries will also include logistics and transportation costs for delivering goods to the final consumer. These costs are widespread among e-commerce companies that rely on a logistics process to place their products in their customers' hands:
- Labor costs of picking and packing
- Packaging costs and supplies
- Shipping costs
- Reverse logistics costs of return shipping and re-stocking
Many companies rely on a third-party logistics (3PL) provider for shipping and fulfillment. Vendor invoices from these providers will typically include some or all of the above processes. However, your own financial data may simply have a line item about money owed to the company that sent you the invoice.
Assembling and subcontracting works
Some business owners may purchase raw materials from one supplier but rely on a third-party company to assemble or manufacture those products. The process itself may be automated or rely on human input (such as on an assembly line). Still, the point is that your company will receive a vendor invoice for assembling the components into a finished product.
This accounts payable example is common in industries requiring complex processes or specialized skills. For instance, "process manufacturing" is a subset of this category where food and beverage manufacturers rely on a third party to produce and package their products. Construction companies may hire subcontractors to perform an area of specialization, such as outsourcing to a licensed electrician or plumber.
Other common examples include:
- Automobile manufacturing
- Assembly of electronic products
- Sub-contracting a web developer or software developer
- Clothing manufacturing
- Outsourcing business needs, such as HR, accounting, or legal counsel
Basically, anytime you hire another company to perform a service for you, the money owed will be listed as part of your accounts payable expenses.
Travel expenses
Broadly stated, business travel expenses refer to any accounts payable journal entry that involves you or your employees traveling for work-related activities. Common examples include reimbursement for:
- Fuel costs (if using personal vehicles)
- Mileage (if using personal vehicles)
- Transportation costs for airfare, train tickets, busses, or taxis
- The cost of rental vehicles
- Lodging and accommodations
- The cost of meals during the trip
- Other travel-related costs, such as laundry, dry-cleaning, and any rentals
- Entertainment while traveling on business (or to entertain a client)
Keep in mind that this portion of your accounts payable balance may offer the possibility of tax deductions. As long as you're traveling for business, you can deduct many of the above accounts payable examples from your annual income taxes.
The only exception includes meals. According to the IRS, only 50% of your meals are tax-deductible. Nevertheless, all of these expenses will appear on your company's balance sheet as accounts payable costs.
What about the cost of your company vehicles? Technically, purchasing and general maintenance costs will be included in your equipment costs. However, the actual fuel costs can be classified under travel expenses and may be recorded on your balance sheet.
Equipment
Your business equipment will likely be some of the largest costs in your accounts payable records. Business equipment refers broadly to anything you need to conduct normal business operations. This includes your physical equipment and assets, such as business software.
Common examples of business equipment include:
- Point of sale (POS) equipment: cash register and credit card terminals
- Office supplies: computers, scanners, and fax machines
- Furniture: office furniture, display racks, waiting room furniture, and countertopsKitchen equipment: industrial stove, oven, refrigerators, and food processors
- Cleaning equipment: vacuum cleaner, cleaning supplies, and trash receptacles
- Audio-visual equipment: loudspeakers, TVs, monitors, receivers, and amplifiers
- Construction equipment: heavy machinery, power tools, stepladders, and safety devices
- Farming equipment: machinery, tools, specialty equipment
- Employee supplies: employee time clocks, break room supplies, and furniture
- Transportation: commercial vehicles
You may also pay a fee for business software, such as:
- AP/AR accounting software
- POS software
- Customer relationship management (CRM) programs
- Web development tools
- Project management software
Since some of this equipment has a high dollar amount, you may record these items as part of an asset account. This method accounts for the depreciation of the equipment over its total lifespan.
For example, if you purchase a new computer, but your company expects that it has a maximum lifespan of five years, your accounts payable department will record the original book value (the purchase price of the computer), then create a depreciation schedule to account for the decline of the item's value over its five-year lifespan.
Leasing
For many businesses, a significant part of their accounts payable costs include leases they pay to third-party companies or individuals for renting equipment or business space. Common examples include:
- Real estate leases: for retail space, office space, or warehousing space
- Equipment leasing: when businesses lease equipment rather than buy it outright
- Industrial plant leasing: for manufacturing businesses or those with high demand
- Vehicle leases: for passenger vehicles, delivery vehicles, or tractors
Software may also be categorized under business leasing. If your company buys a computer program as a one-time installation or download, you own this product outright. However, many companies now offer a software-as-a-service (SaaS) business model in which you pay a monthly fee to access the program. In this model, you might categorize the software as a leasing expense.
Additionally, real estate leasing may or may not include other overhead costs, such as utilities or insurance. You may need to factor these costs into your total real estate fees.
Leasing costs are generally considered fixed in that they don't typically change from one month to the next. However, this may be a critical area where you can cut overhead costs by negotiating better leasing terms with your providers or considering alternative sources to shave some money off your company's operating expenses.
Licensing
Licensing fees refer to the expenses you pay to operate your business legally. These fees vary by your geographic location as well as your industry. For example, common licensing costs include:
- Professional licensing unique to your profession: doctors, lawyers, barbers, beauticians, etc.
- Business licensing: needed to operate in your state, city, or industry (e.g., bars)
- Intellectual property licensing: needed to use someone else's creative product (e.g., a logo)
Remember: most types of business licensing require regular upkeep. Your accounts payable process must, therefore, account for both the cost of acquiring and renewing the license.
For some professions, such as mental health clinicians and certain financial professionals, your licensing is conditional upon completing continuing education. Your accounts payable data will, therefore, include these tuition fees and ongoing costs as part of the cost of maintaining your professional license.
Computer software licenses can be accounted for as a licensing fee. But modern, subscription-based software platforms can also be classified under leasing costs since you'll be paying every month.
Vendor payments
Other expenses might fall broadly under the category of vendor payments. For instance, if your company purchases goods from a third-party vendor, the cost of these items will fall under vendor payments.
Some typical accounts payable examples include:
- Inventory ordering or replenishment
- Paying for services, such as cleaning, construction, etc.
- Utility payments
Any expense not covered by your other general ledger entries can be classified as a vendor payment, assuming the expense is reflected in your invoices.
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