Does Paid Cash on Accounts Payable Affect Total Assets?

Accounting is a very useful tool to have in the back pocket for managers.

Knowing how accounting statements work is very useful for managers. There are times when you have to evaluate your own financial statements and make sure your company is making the right journal entries. There are three parts to a balance sheet: assets, liabilities and stockholders' equity. The basic accounting equation is assets equal stockholders' equity plus liabilities. When assets rise then liabilities or stockholders' equity rise and vice versa. Cash paid to settle liabilities such as accounts payable affects two of the three parts of the balance sheet.

Balance Sheet

A balance sheet is a snapshot of the firm's assets, liabilities and stockholders' equity taken at a moment in time. On the asset side, it include accounts as cash, inventory, prepaid expenses, long term investments, marketable securities, property plant and equipment, and others. On the liabilities side, there are accounts such as notes payable, loans payable, accounts payable, salaries payable and others. Stockholders' equity consists of retained earnings as well as capital that the owners have contributed to the company.

Accounting Equation

The basic accounting equation is the foundation of all accounting. It states that assets equal liabilities plus shareholders' equity. When you post a journal entry, at least two of the three parts of the balance sheet have to change. It is also very useful to think about when trying to figure out how journal entries work. If you have a cash inflow, you know that cash and total assets rise. All that's left is to figure out why it rose. If it rose because you took out debt, then liabilities rise. If it rose because you made a sale, then stockholders' equity rises.

Cash Paid On Account Payable

It is helpful to think about this using the formula. The first step is you know that cash is paid out and you know that cash is an asset.Then you find out what it has been paid out for, and it has been paid for accounts payable, which is a liability. So assets decline and liabilities decline. It is that simple when you follow the formula. Total assets are affected when you pay cash on accounts payable. Total assets decline.

Balance Sheet Tips

When analyzing your balance sheet, it is important to know how different accounts are recorded. For example, cash is recorded at market value. However, inventory and other items are generally recorded at cost. Because of that, some of the asset values stated on the balance sheet may not be fair values. When you are trying to see how much of a cushion or collateral you may have, try to adjust the different balance sheet accounts to what you think fair value is not just what is stated on the balance sheet.

References

• "Zions Bank"; How To Prepare And Analyze A Balance Sheet