Calculating Accounts Payable on Your Balance Sheet

Calculating accounts payable is extremely important for business owners as the nature and the size of their accounts payable could have a dramatic effect on their businesses cash flow.


Accounts payable involves short term liabilities, also known as current liabilities owed to other parties by a business or entity. In many cases suppliers of products or services will allow for a short period after delivery before an invoice is due for payment. This period then creates an accounts payable when the pending charge or cost is tracked in the accounting world.

Calculating Accounts Payable - It's Short-Term Nature

Calculating Accounts Payable

As mentioned above the nature as well as the size of accounts payable is important because they have a direct impact on immediate cash flow. Unlike long-term liabilities such as loans, accounts payable hit and come due usually within 30 to 60 days. And they often involve irregular patterns of charges that don't appear monthly.

Tracking and Display of Accounts Payable

In a very simple accounting system, accounts payable can simply be entered as line item transactions. The system keeps a separate individual ledger behind the scenes for each account and the display shows all of them in aggregate to provide the pressure point of what's owed. If a report is run, however, it will detail the individual ledgers of each account outstanding, and some even provide details on aging so a user can see which accounts are late versus still have time. This stresses the importance of calculating accounts payable on a regular basis.

Calculating Accounts Payable and its Placement in the Balance Sheet Report

As accounts payable are aggregated, this combined short-term liability figure rolls into the overall liabilities figure and categories displayed on the balance sheet report. Accounts payable as a result adds to the liabilities total which is offset to the asset side of the balance sheet report. As the accounts payable figure goes down, it allows for more assets to be available to be used for either long-term liabilities or equity. As the accounts figure increases, however, it eats up more of the asset side of the house, reducing funds available for long-term commitments or equity. This second aspect is why calculating accounts payable is so important. So also is keeping a good handle on the payables side, especially the short-term charges coming due quickly. If not controlled, they can upset the asset picture very quickly.

Cash Flow Impact

While not part of the balance sheet, it's important to note that accounts payable also have a significant influence on cash flow and profit and loss statement reports as well. Where a business is cash flow poor, these accounts can create all sorts of headaches, causing a business to have to scramble to pay bills and pulling money from other liabilities and needs. This is why cash flow management is so critical; a business can be asset rich and still have major problems if it doesn't manage the timing of its bills carefully each month.

The income statement impact is obvious as well; as accounts to be paid shortly eat up gross income,  operating margins shrink leaving less net cash for the business at the end.

As a result, accounts payable may seem like a small issue as an individual charge, but in total they have a significant impact on the balance sheet as well as other critical accounting reports.

Accounts Payable Articles

Learn more about Accounts Payable

Read about Accounts Payable in Santa Rosa

Find out about the Accounts Payable Spreadsheet

Read how Accounts Payable Affect Cash Flow



Please subscribe to my monthly newsletter, Bookkeeping Basics E-zine. It tells you each month about the new information that I have added, including some great tips and advice from myself and other Bookkeeping Basics readers.


Enter Your E-mail Address
Enter Your First Name (optional)
Then

Don't worry — your e-mail address is totally secure.
I promise to use it only to send you Bookkeeping Basics E-Zine.


Like Bookkeeping-Basics.net?


New! Comments

Share Your Comments, Tips & Advice! Leave a comment in the box below.