Liabilities can be defined as the amount that is owed by a company in exchange for goods and services that the company has utilized or plans on utilizing over the course of time. This is the amount that needs to be paid by the company, and therefore, should include a number of different things.
Liabilities can broadly be categorized into Financial and Non-Financial Liabilities. Whereas Financial Liabilities can be regarded as liabilities that are incurred as a result of normal discourse of the business, where liabilities are mainly subdued in cash, non-financial liabilities are the opposite.
On the other hand, non-financial liabilities are mainly contingencies or types of liabilities that are not of financial transaction origin. Examples for these liabilities include deferred revenue, advances received and provisions that might have to be made as a result of these changes.
Non-Financial Liabilities mainly require non-cash obligations that need to be provided in order to settle the balance, which includes goods, services, warranties, environmental liabilities or any customer liability accounts that might otherwise exist.
In other words, non-financial liability can best be described
as an obligation that is associated with the retirement or maintenance of a
long-lived asset in the future. Therefore, it might be contingent on certain
outcomes, based on which the company would then have to complete the required
payout.
Measurement and Accounting Treatment
According to IAS
37, Non-Financial Liabilities should be measured at amounts that would
rationally be paid to settle any present obligation or amount to transfer it to
a third party on the balance sheet date. An entity is supposed to recognize a
non-financial liability when the definition of a liability has been satisfied,
and the non-financial liability can be measured reliably.
The basis of estimating non-financial liabilities relied on the expected cash approach. In this regard, multiple cash flow scenarios are used which reflect the range of all the possible outcomes, coupled with their respective probabilities.
This is primarily because of the reason that the expected cash flow approach is an approach that makes an appropriate basis for measuring liabilities and classes of similar obligations for single corresponding obligations.
Additionally, it can also be seen that Non-Financial Liabilities can be measured before tax. In the same manner, an entity is also supposed to include all the relevant risks and uncertainties. Similarly, the non-financial liability should be canceled when the obligation is settled, or canceled.
In the case where the Non-Financial Liability cannot be measured properly, it shall make complete disclosure about certain disclosures so that relevant information can be communicated to other people.
Conclusion
To conclude, it can be seen that Non-Financial Liabilities can be regarded as contingent liabilities which may or may not occur. The overall assessment of this particular task is based on the risk and return rationale, relating to the possible outcomes which might occur as a result of the fulfillment of this obligation.
Calculation and recording this particular liability is an important aspect, and because of the importance of this possibility, it should be duly communicated to the shareholder in the year-end financial statements.
Accrued Liabilities can be defined as an obligation that a corporation has assumed in the case of the absence of a confirming document.
This is an internally created memorandum which is prepared in the case where the corporation is yet to receive a confirmation, like an invoice, from the supplier or the biller, but they have already consumed the goods or services. Subsequently, in this case, the accountants are supposed to record it as an accrued liability.
As mentioned earlier, it can be seen that Accrued Liability is regarded as an expense that needs to be paid for by the company but has not been billed for.
According to the matching principle, and the principle of relevance, it only makes sense to record the current year’s expenses in the current year’s financial records. There are a number of examples of such transactions, some of which are mentioned below:
During a normal course of the business, there are wages and salaries that are incurred over a certain time frame. As a matter of fact, it can be seen that these wages and salaries need to be paid for, but there is not a proper invoice regarding the hours they have been billed. Therefore, this is going to be treated as an Accrued Liability.
In the same manner, taxes and interest rate payments carried forward from one year to another are also treated as a Current Liability.
Treatment
Speaking of the treatment of an accrued liability, it is calculated on the basis of the quantity information in the receiving log, as well as the pricing information mentioned on the authorized purchase order.
The main rationale behind this particular entry is to ensure that the expense of obligation is duly recorded in the period where it is initially incurred.
As far as accrued liabilities are concerned, they are expenses that have already been incurred and need to be paid for. Therefore, under the matching principle, they are supposed to be treated as current liabilities to denote that these are liabilities that need to be paid in the current time period.
Hence, it can be seen that accrued liabilities are placed in the Balance Sheet (or Statement of Financial Position) of the company, in the Current Liabilities section, unless they have been paid for. After payment, they are then eliminated from the Balance Sheet. The reason behind their classification is primarily on the grounds of the debts that need to be honored within a cycle of 12 months.
Conclusion
To conclude the points mentioned above, it can be seen that accrued liabilities are also referred to as accrued expenses. Examples include accrued salaries, wages, interest and tax payments and so forth. Therefore, these expenses are mainly clubbed in order to simplify the presentation process.
Regardless of the fact that they should be treated as Accrued Liability, yet it can be seen that they are reported as Current Liability because of their very nature.
In the same manner, it can further be noted that these liabilities are short term, and need to be settled at a time interval of a few months, because of the fact that they are expenses that are incurred in the day to day running of the business.
Accounts payable represents the purchases that are unpaid by the enterprise. In the cash conversion cycle, companies match the payment dates with accounts receivables making sure that receipts are made before making the payments to the suppliers.
Lower the accounts payable days the better. It reflects that the company is able to realize the cash in good fashion.
Accounts payable aging report
An accounts payable aging report is a vital accounting document that outlines the due dates of the bills and invoices a business needs to pay. The accounts payable aging report categorizes the payables as per days outstanding.
An AP aging report is organized into separate “categories,” with each category representing a 30-day period. The categories are usually:
Current – invoices that are within terms
1 – 30 – invoices that are 1 to 30 days past due
31 – 60 – invoices that are 31 days to 60 days
past due
61 – 90 – invoices that are 61 days to 90 days
past due
90 – invoices that are more than 90 days past
due
Importance of accounts payable aging report
Accounts payable aging report helps you figure how well you are paying your bills and helps you prioritize payments. The importance of accounts payable aging report can be summarized into the following points:
1) Conversion cycle
The accounts payable aging report, when combined with the accounts receivable aging report, is able to show if the payments have significant lag or are made way before the desired time.
This gap between the time impacts the desired or near-perfect conversion cycle of inventory. The aging analysis comparison makes it possible to minimize the gap between payments and collection and reduce the conversion cycle as much as possible. This will lead to better liquidity of the enterprise.
2) Reconciliation of accounts payable
Accounts payable aging analysis is a handy tool to reconcile accounts payable to the general ledger. The general ledger is an important accounting record that incorporates all financial transactions.
The amounts in the accounts payable journal and the account in general ledger book shall match. This can be reconciled periodically say monthly with aging accounts payable.
If this does not match, the accountant shall examine the details of the accounts payable account in the general ledger to determine the problem. For example, this might happen if manual entries were made to the general ledger but not in the accounts payable system.
3) Payables management
Accounts payable aging analyzes the bills the company owes. While taking longer to pay bills could help effectively the company’s cash flow, it’s not always the best option.
The company could be missing out on early payment discounts or be incurring financing fees. The company may have older accounts payable meaning the company is not able to pay it on time.
The aging reports help to identify those payables so that the company can make immediate payment to payables or rectify the underlying cash flow problem in the company.
Hence, the accountants shall regularly review the aging report to identify accounts that need action and track the progress of strategic adjustments that need to be made.
Accounts payable are the expenses recognized on the liability side when purchases are made on credit. These are ongoing company expenses and are short term debts to be paid within 1 year so as to avoid default.
Accounts payable is the total amount of short-term obligations or debt a company has to pay to its creditors for goods or services bought on credit. Accounts payable is the result of purchases made on credit.
Let’s take an example:
Davidson company makes purchases worth USD 1 million on December 1 with 60 days payment terms. Now at the end of the current financial year, the company shall recognize USD 1 million as accounts payable.
Process
flow of accounts payable
To
understand how to reconcile accounts payable, first the audit trail of accounts
payable needs to be created. The following is the paper trail in the cycle of
accounts payable:
The buyer asks for a quotation from suppliers along with payment terms and conditions.
The buyer makes the purchases from suppliers on the account.
The buyer receives the inventory/purchases.
The buyer checks the purchases made for the quality he ordered and decides whether to accept the order in partial and full.
The buyer makes purchases return for purchases which are found to be defective.
The buyer makes the payment in full.
Any outstanding liability is carried forward to next year.
Withstanding the size and nature of the company, the objective of the company is to pay the company bills and invoices that are legitimate and accurate.
Why review accounts payable?
The company’s objective is to protect its cash and cash equivalents used to pay to accounts payable. Hence, the accounting system ought to have strong internal control systems to prevent paying fraudulent invoices, prevent paying twice to vendors and prevent paying for the inaccurate invoices.
Further, the accounts payable terms shall be accepted in such a way that it benefits the collection process of receivables and saves the cost of money.
Reviewing
accounts payable
The process flow of accounts payable helps to depict what needs to be reviewed to get accurate accounts payable and strong policy in hand. Here are the accounting documents and aspects that need to be reviewed to check accounts payable balance.
Purchases order
When the company wants to make the purchases, the first step is to make the purchase order quoting the number of materials required along with quality and other dimensions.
The purchase order will indicate a PO number, date prepared, company name, vendor name, name and phone number of a contact person, a description of the items being purchased, the quantity, unit prices, shipping method, date needed, and other pertinent information. It shall be reviewed in cross-matching which we discuss later on.
Receiving report
When the goods are received, the buyer records the inventory in receiving the report. After the receiving report and purchase order information are reconciled, they need to be compared to the vendor invoice. Hence, the receiving report is the second of the three documents in the cross-matching.
Vendor Invoice
Later on or along with the inventory, the vendors send the invoice depicting the number of goods sent and the amount to be paid along with terms and conditions of payment.
Cross-matching
This is the process to make sure that only valid and accurate invoices are recorded and paid. The cross-matching involves matching purchase order which states what has been ordered with receiving report mentioning what is received alongside invoice which states what vendor billed the buyers.
After determining that the information reconciles, the vendor invoice can be entered into the liability account Accounts Payable and is reviewed properly.
Vendor confirmation
The vendor confirmation is a periodical confirmation of balances at the end of the accounting period. It helps to ensure that balances as per ours and vendors book matches.
When there is a difference, the reconciliation statement has to be made in order to mend what the accounts have been missing. These are generally year-end transactions that may have missed the recording.
Aging analysis of accounts payable
Historical aging analysis of payables helps the company. The payables shall be categorized based on outstanding up to 30 days, 60 days and 90 days. The payables above 90 days are critical in nature and need immediate attention.
The analysis of the ageing report of payables helps to perfectly put the company to have better negotiation in having accounts payable policy with the vendors.
Accounts payable are the expenses recognized on the liability side when purchases are made on credit. These are ongoing company expenses and are short term debts to be paid within 1 year so as to avoid default.
Accounts payable is the total amount of short-term obligations or debt a company has to pay to its creditors for goods or services bought on credit. Accounts payable is the result of purchases made on credit.
Let’s take an example:
Davidson company makes purchases worth USD 1 million on December 1 with 60 days payment terms. Now at the end of the current financial year, the company shall recognize USD 1 million as accounts payable.
Process
flow of accounts payable
To
understand how to reconcile accounts payable, first the audit trail of accounts
payable needs to be created. The following is the paper trail in the cycle of
accounts payable:
The buyer asks for a quotation from suppliers along with payment terms and conditions.
The buyer makes the purchases from suppliers on the account.
The buyer receives the inventory/purchases.
The buyer checks the purchases made for the quality he ordered and decides whether to accept the order in partial and full.
The buyer makes purchases return for purchases which are found to be defective.
The buyer makes the payment in full.
Any outstanding liability is carried forward to next year.
Why reconcile accounts payable?
Keeping accurate bookkeeping records generates trust among the stakeholders involved. If you don’t pay suppliers on time and in the right amounts, they may be reluctant to grant credit again. So, checking and reconciling accounts payable time and again, you are able to generate financial trust among your suppliers.
The reconciliation processes:
Reconciliation must ask the following question and answer them
:
Are the detailed list and the ending balance
both from the current quarter?
If you’re using budgeting software, did you post
accounts payable properly to the general ledger?
Did you print your accounts payable figure after
all the posting was complete?
The reconciliation of accounts payable has to be done in the
following phased manner:
1) Bookkeeping
The first step would be to match the amounts in the invoices and cross-check them with the inventory balances. The accountants shall do this process on a periodical basis say monthly. This ensures that the account agrees with the general ledger at the end of the year.
2) Vendor statements
This is basically the party confirmation
about the balances that vendors have of ours in their books. The vendors also
record the sales made to the buyers as accounts receivable.
3) Accounts Payable Journal
This is the balance in your accounts payable that should represent the total you owe to all vendors. This is basically the list of all individual accounts where all the balances are added for the month and checks issued are deducted arriving at the month-end balances. This balance has to be reconciled with accounts payable ledger balances.
4) Reconciling Accounts Payable to General Ledger
The case generally is that the accounting software that accountants use has the key feature to post to accounts without impacting ledger accounts. This means that the accountant can enter all the accounts payable balances.
The accountant shall Compare the total for accounts payable on the general ledger to your adjusted total from your aging report. If numbers agree to which it should, there are no issues. Otherwise, the accountant has to dig deep into data and find which vendor balances he is missing.
5) Transaction summary by account to compare to the aging.
The easy way to reconcile the aging to control account is by creating a transaction report for the accounts payable balances and group it by account balances.
This will help to compare the total transaction report to the aging report for each customer or vendor. The differences if any are easily taken out by the creation of transaction reports by account grouping.
Accounts payable are the expenses recognized on the liability side when purchases are made on credit. These are ongoing company expenses and are short term debts to be paid within 1 year so as to avoid default.
Accounts payable is the total amount of short-term obligations or debt a company has to pay to its creditors for goods or services bought on credit. Accounts payable is the result of purchases made on credit.
Accounts payable form the largest portion of the current liability section on the company’s financial statements.
It represents the purchases that are unpaid by the enterprise. In the cash conversion cycle, companies match the payment dates with accounts receivables making sure that receipts are made before making the payments to the suppliers.
Lower the accounts payable days the better. It reflects that the company is able to realize the cash in good fashion.
Let’s take an example:
Davidson company makes purchases worth USD 1 million on December 1 with 60 days payment terms. Now at the end of the current financial year, the company shall recognize USD 1 million as accounts payable.
Now the question is that Davidson company has made similar purchases through various suppliers. These various accounts are grouped as they have the same characteristics and nature being short term liability originating from purchases of goods unpaid.
Accounts payable is current liability by nature as it is short term debt and obligation is to be paid within 12 months. Hence, being liability it is to be shown on the credit side of the balance sheet.
