The Key Accounting Considerations Relating to Accounts Payable
The accounts payable section of your company's balance sheet acts much like a desk drawer full of IOUs. Without the accounts payable section, the outstanding financial liabilities of your company are misstated. Additionally, you could forget to pay clients for services they performed. There are key accounting considerations concerning accounts payable that accountants keep in mind when updating the balance sheet and filing taxes at the end of the year.
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Cutoff Dates
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The cutoff date for accounts payable is critical to paying bills on time and avoiding legal or accounting hassles. Companies typically have an agreed "pay by" date for accounts. If the outstanding balance is not paid within a specified period, the late company may incur legal or monetary penalties. For example, if a company orders $100,000 of inventory, but does not pay for the inventory within 60 days, the company from which they bought the inventory may charge more for the same inventory later.
Overpayment
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Overpayment occurs when an item turns out to be more expensive than originally expected. For example, your company could hire a firm to build a piece of machinery for a predetermined price, which is listed in your accounts payable. However, due to some unforeseen challenge, the machine costs more to build than previously estimated. Your company must have a policy in place that determines how much lower-level employees can overpay an accounts payable item before additional spending authorization is needed, and at what point the accounts payable line item must be modified to reflect the new cost.
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Liabilities
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Accounts payable is a liability on your company's balance sheet. If your company plans to borrow money for operations in the future, it may need to lower its liabilities to be more attractive to lenders. For example, a company with a large accounts payable may appear to be reluctant or unable to meet its financial obligations. Using capital to pay off the liability makes your company's balance sheet look healthier, and it could increase your credit rating.
Documentation
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Any accounts that your company settles on its accounts payable must receive an employer identification number (EIN) with payment. Customers file your EIN with the IRS to claim income they received from your company. Without the EIN, your customers cannot properly claim income, which could cause tax problems later. However, your company does not need to provide its EIN to employee reimbursement items.
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