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.