For companies using accrual accounting, conforming to standards set by the Generally Accepted Accounting Principles (GAAP) means tracking, recording, and reporting all financial transactions as completely and accurately as possible.
Accounts payable accruals, a particular kind of expense, require special attention when readying financial statements for year end (i.e., the end of the fiscal year) and other accounting periods.
What Are Accounts Payable Accruals?
To understand accounts payable accruals, you must first understand accrual basis accounting. In this method of accounting, both revenue and expenses are recorded in the general ledger as they occur, rather than when payment is actually sent by the buyer or received by the vendor.
Accrual accounting systems record all revenue (assets) and expenses (liabilities), including material orders, service fees, wages payable, and taxes, as soon as they happen. They’re later reconciled with adjusting entries when bills are paid or revenue is received.
Any person or company that provides goods or services to your company is recorded as an account payable (AP) on your balance sheet.
(Compare this to cash basis accounting, where cash flow is king, revenue doesn’t hit your accounting books until it’s in hand, and journal entries for expenses aren’t recorded until they’re paid. Small businesses generally rely on cash accounting more than their larger corporate brethren because it provides an advantageous tax position and may be less complicated for a single entrepreneur or small team to manage.)
Any accrued expense a company incurs but hasn’t paid is known as an accrual liability. Also called expense accruals, these transactions are recorded on the balance sheet as accounts payable liabilities and on the company’s income statement as an expense.
At the end of each accounting period, all accrued liabilities are adjusted on the balance sheet to provide documentation for goods delivered and services performed that have not yet been billed.
Examples of accrued expenses include, but aren’t limited to:
- Water, electricity, and other utilities used within a given month but for which the invoice will not be received before the end of the accounting period.
- Wages payable and incurred, but not yet paid to, employees.
- Goods and services received from or performed by suppliers but for which no invoice has been received.
Accounts payable accruals are a specific type of accrual liabilities that fall into that last category. They’re generally short-term (i.e., current liabilities) your company expects to repay within a year or less. These transactions are generally periodic and related to goods and services provided by your vendors, as well as general business operations. Wages payable and other liabilities like loan payments fall outside this category of accrued expenses.
Note: While accounts payable are indeed accrued expenses, the term accrual in this context is specific to short-term expenses incurred to vendors that have not been paid prior to the end of a specific accounting period, and not interchangeable with the more general concept of accrual used to describe (for example) a company’s entire outstanding financial obligations.
“It’s important to record accruals and monitor them carefully because doing so helps you keep tabs on cash flow and prevents you from overestimating your available working capital for current and future expenses (as well as current expenses that won’t be paid until a future date!).”
Recording Accounts Payable Accruals
At the end of a given accounting period (usually the fiscal year), all accrued expenses for that period must appear on the balance sheet, along with all the income your company has received. With regard to accrued expenses, it’s very likely you’ll have received goods and services that were received or performed within the accounting period, but aren’t due to be paid for until the period’s over.
For example, let’s say your company’s fiscal year ends December 31st. You ordered new computers for your marketing department for $12,000 in November of 2019. The computers were received in November, but were not billed by the supplier until February of 2020, and the bill itself isn’t paid until March.
The bill wasn’t paid until March 2020, but the computers themselves were received in the previous fiscal year. The proper journal entries must be prepared to reflect the actual date the expense was incurred in order for your balance sheet and other financial documents to be accurate and complete.
When the computers are received, you’d record a $12,000 debit to the vendor’s account, and credit the same amount to accrued expenses in AP (an accounts payable accrual).
When payment is made in March, additional journal entries (adjustment entries) will be added to reconcile the outstanding AP accrual. You’d record a $12,000 credit to the vendor’s account, and a corresponding debit to accrued expenses.
In this way, the financial statements for both 2019 and 2020 are complete and accurate, with a clear connection between the actual receipt of the computers and the date they were actually paid for by your company.
It’s important to record accruals and monitor them carefully. Doing so helps ensure you can record accrued expenses for the proper tax period, for example. It also helps you keep tabs on cash flow and prevents you from overestimating your available working capital for current and future expenses (as well as current expenses that won’t be paid until a future date!).
Automation, Analytics, and AI Can Help You Manage AP Accruals
For both your long-term and current liabilities, implementing advanced digital tools like PurchaseControl—either as a complete AP automation solution, or in tandem with existing accounting software—gives you greater transparency and control.
- Capturing every transaction, as well as all associated documents, across the entire procure-to-pay (P2P) process, makes it a snap to record all expenses as they’re incurred; cash flow is calculated from complete data, reducing the chances you’ll be caught short when you need capital most.
- Automatic three-way matching reduces errors and exceptions, and gives you the option of capturing early payment discounts if desired.
- Full integration with your accounting software means every entry can be transferred automatically, without the need for time-consuming, error-prone manual data entry.
- In-depth analytics, accessible in real time, make it possible to analyze all your spend data for accurate, audit-friendly, and complete financial statements, as well as actionable insights for strategic forecasting.
Record and Monitor Now, Pay Later
Planning for the future, and paying the piper, is a lot easier when you have a clear view of everything you’re working with. Keeping an eye on accounts payable accruals, recording them accurately, and using the right tech tools to help you manage means you’ll have a clear view of your cash flow, accurate financial accounting, and won’t be taken by surprise when it’s time to settle up with suppliers.
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