Are Accounts Payable An Expense?
Business success emerges from the ability of its owners to spot opportunities and borrow money to fund these. Borrowing through long-term or short-term debts allows more sales, smoother operation, and more profits. Thus, every business is faced with accounts payables to settle unpaid supplies, materials, taxes, and other debts.
In its real sense, accounts payables refer to the accrued liabilities or current liabilities the business is bound to pay its creditors or suppliers.
Accounts payable vs accrued expenses
There is a very thin demarcation line between accounts payables and accrued expenses considering that the two are payable obligations by the business. However, by definition, accounts payable refer to anything purchased on credit while accrued expenses pertain to regular recurring outlays. When the company buys through credit, then the purchase will be tagged as an account payable.
|Specifics||Accrued Expenses||Accounts Payable|
|Where can you find it?||Refer to periodic expenses that are already paid and should ideally be included in the company’s income statement||Refer to the obligations which should be paid within the period and are usually entered on the company’s balance sheet|
|Occurrence||All companies have accrued expenses that were done in the past and are tracked through accrual accounting.||Occurs only when a company buys something on credit.|
|Definition||Accrued expenses are payables that do not come with an invoice||Accounts payable should always have an invoice with them|
|Recording||Recorded periodically or at the end of the year and maybe adjusted in the journal entries||Recorded only when a company incurs debt or purchases something on credit|
Accrued expenses and accounts payables are essential in a company’s financial statement in order to balance its books. To manage these items, one should have an in-depth understanding of accounting practices to perform the right journal entry. Depending on how the books are balanced, a company can manage these two more efficiently to ensure a more stable cash flow and higher chances of getting a line of credit.
All operating expenses and purchase orders not paid in cash are accounts payable that come with vendor invoices. These must be reconciled with the revenues at the end of the year.
What is accrual accounting?
In a company’s income statement, accruals are either accounts receivables or payables which will be received or made at a later date.
Accrued revenues refer to assets or income (cash or non-cash) that will be received by the company in the future. These may not cover the current money deposited in the company’s bank account. A common example will be the case of electric companies that provide electricity to consumers. The company allows for electricity consumption in one month. The customer then uses the electricity and will pay based on his monthly statement. The electric company should wait for each end of the billing period before receiving payments from the customers before the due date. These payments are considered as accrued revenues for the company.
Accrued expense refers to products and services acquired through credit and is a debit on the company’s income. One example is when a manufacturing company takes out materials from a supplier through credit. The materials are used to manufacture and sell products. The company has already utilised the goods and is obliged to pay the cost of the materials on an accrual basis. The payment is considered an accrued expense of the company.
If a company chooses to pay via credit card, the purchase is still considered accounts payable because the company may be indebted to the credit card company and not to the supplier.
What is the impact of expense on a balance sheet?
Whether it is a short-term expense or something payable in a year, anything spent means a deduction on the small business’s profit. However, the impact of an expense can be clearly seen on a balance sheet in several situations:
- Accounts payable – Any purchase with an invoice is recorded under the accounts payable function. The entry increases the accounts payable and automatically decreases the retained earnings function.
- Accrued expense – Every accrued expense either lowers or increases the accrued liabilities function. This also decreases the earnings function on a balance sheet.
- Cash payment – When a purchase is paid in cash, the cash or asset account declines. thus, the balance sheet would reflect either a lowered current asset or equity.
Do accounts payable affect cash flow?
Accounts payable can be both an advantage and a disadvantage on a company’s cash flow. The ability to purchase on credit broadens accompany’s potential to produce, manufacture and operate through credit. Without accounts payable, the business is limited only to its current finances and may not have the chance to grab market opportunities.
Accounts payables can become a disadvantage if wrongly handled. A business should acquire opportunities through credit but should also pay according to the agreed terms. If not settled on or before the due date, accounts payables may lead to accrued interests and missed borrowing opportunities.
What are expense accruals and their effect on the income statements?
Expense accruals are payables to be made by the company. As earlier discussed, these are expenses that need to be settled as these are reflected as liabilities on the balance sheet. An increase in accrued expense means a decrease in the income statement and vice versa. However, business owners should be aware that there are instances when an accrued expense or accounts payable may not be properly entered or omitted by the bookkeeper on a balance sheet. Manual bookkeeping often leads to accounts payable omission. If this happens, the company’s accrued liabilities will decrease and its net income will be overstated and falsely recorded.
Why should you automate your accounts payable and expense recording?
Accounts payables and accrued expenses play an important role in reflecting the company’s true financial condition. Whether businesses are earning or not can be concluded through the balance sheet that reflects earnings and liabilities. Automating the recording of accounts payable and accrued expenses can help every business come up with the correct financial statement.
Accounts payable automation can help you:
- Save time – Manual data entry means slow and repetitive work that takes so much time and energy. Automating accounts payable can be done in an instant through the use of accounting software.
- Reduce errors – Computerized accounting systems are definitely more accurate compared to manual tasks which are prone to human errors.
- Digitize storage – Again, manual accounting requires a huge space to store receipts, invoices, and other financial documents. Through digitizing processes, the important papers can be stored in the cloud.
- Increase productivity – Business Owners can reduce expenses on manpower and can assign other tasks to each staff. Instead of spending hours entering expenses and liabilities on the journals and balance sheets, the accounting team can do other stuff to increase productivity.
- Access accounts payables anytime and anywhere.
Consolidating business transactions and recording them as revenue, expense, liability, or accounts payable is important. Automation undoubtedly provides ease, accuracy, and accessibility making the entire recording process an efficient aspect of the operation. Business owners can now choose to automate accounts payable through many SaaS providers that understand the significance of accounting in reflecting the business’ progress within a financial year.
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