How to Calculate Accounts Payable

In order to increase the existing levels of company performances, the accounts payables can be considered as an important factor. Building good relationships with the suppliers is helpful to increase their sales and profits. In this article, we will identify the ways in which the accounts payable entries are recorded in the accounting systems and how to calculate accounts payable. Following sections elaborate the double entry principles related with the creditors and the formulas used to calculate the creditor’s payment period.

Accounts Payable

When a company buys raw materials from their suppliers on credit terms, it is recorded in books as account payables / creditors. If the company does not pay within the given period, it needs to pay penalties or interest payment additionally to the purchase value of goods. Buying goods for credit from suppliers creates advantage for the organizations as they can invest that amount of cash to gain additional profit. Therefore, in the organizational perspective they try to lengthen the credit period offered to them, and the suppliers try to shorten the payment terms they offered to the buyers . Anyway, it is better to settle the suppliers credit on time in order to build good relationships and to work with them for a longer time period. It again affects financial stability of the company which reflects on the current ratio. Current ratio elaborates the organization’s possibility of recovering their current liabilities with their current assets. When external parties are buying shares, they consider the company’s financial stability within the industry. They would consider about the performance of the company compared to previous years.

Accounting for Payables

Trade payables are included in the balance sheet under current liabilities as the payments are due to be settled within a year. There can be different kinds of payables like dividends payable, accrued expenses and payroll expenses, and they are recorded separately in order to identify them easily. The double entry for credit purchases can be recorded as follows:

Debit Purchases (Income Statement)
Credit Account Payables

When accounting for trade payables, it is recorded in the accounts payable account as a credit and debit to the account expense account. 

When the amount is settles by the creditor, it can be recorded as below:

Debit Accounts Payable
Credit Cash

The payment period offered to its customers can be measured using the accounts payable days formula as illustrated below: 

Accounts Payables Turnover = (Credit Purchases)/(Average accounts payables)*365 days

Using the above Accounts Payabl days Formula, the allowed days for the cash payments can be calculated and by paying earlier than the given time period, would be helpful to achieve the ultimate goals of the organization. It would be useful to build trust between different suppliers and then they would agree to supply bulk quantities for credit with -he long term relationship with them. 

About the Author: admin

Leave a Reply

Related pages

endosperm definitioncyclic aliphatic hydrocarbonsdifference between bi carb soda and baking sodapermittivity definition physicsdifference between marasmus and kwashiorkormeaning of projected balance sheetsingle phase waveformam vs fm radio wavesfur seal vs sea liondifference between zener diode and pn diodematte vs flat paintdifference between anorexia nervosa and bulimiapossessive adjective possessive pronounis absorbance directly proportional to concentrationadjective form of prosperityangular momentum and linear momentumpolar vs non polar bondspincocytosisdifference between live wire and neutral wirehomophones and homonymswhat is a simile metaphorextended metaphor in romeo and julietchemical adsorption vs absorptiondifference between phonology and phoneticscompare fet and bjtanabolic and catabolic definitionhow does metaphase i differ from metaphase iiexamples of puns in literaturedifference between elevator and liftwhat are constructive and destructive wavesdifference between potassium and potassium gluconatedifference between ranch and farmwho can claim gst refund in singaporewhat is the difference between nautical miles and milesdifference between rite and rightprokaryotes vs eukaryotes dnavit b12 structureconsonance literaturewhat is the difference between pasteurized and unpasteurized honeynonpolar moleculesdifference between complex and compound sentencesxylem phloem differencehow are conductors different from insulatorsliterary example of satiredifference between rite and rightdifference between ammeter and voltmeterwhat is bicameral legislatureexample of portmanteaucytoplasm cytosoldefinition of polar substancethe difference between rationalism and empiricism is thatdifference between resistance and resistivity physicsdifference between hair straightening and hair smootheningdistinguish between granulocytes and agranulocyteschemical structure of glucose and fructosedefine cations and anionswhat is the difference between ionic covalent and metallic bondsmarzipan vs fondantrealism or naturalismmalt milkshake differenceprepositional verbs and phrasal verbswhat is the difference between kinematic and dynamic viscosityothopneawhat is the difference between kefir and yogurtdifference between hypertonic and hypotonicaccommodation according to piagetwhat is difference between osmosis and diffusionstars on australian flag meaningcompare the phosphates sugars and bases of dna and rnaintra and intermolecular forcespetroleum ether densitywhat are some differences between animal and plant mitosisassimilation versus acculturationamplification literary devicedifference between a hotel and motelhypersomnia narcolepsywhat are diploids and haploidsorthnopneaexample of blank verse poem