Accounting Methods for Accounts Payable
The company’s controller or finance director makes the decision on how to process all expenses a company incurs. She has several options to choose from, including the cash basis, accrual basis or a combined method that uses both. The method used determines how the accounts payable department handles payments, distributions and disbursements.
Other People Are Reading
-
Cash Basis Method
-
If the company elects to use a cash basis method of accounting, this affects how the accounts payable clerk handles business payment transactions. Accounts payable, by definition, refers to all expense items a business incurs during the course of business and the way in which the clerk processes them for payment. Using the cash basis, invoices, bills, expense reimbursements and any expenses to conduct business are recognized when paid.
Accrual Basis Method
-
Distributions for expenses occur at the time of entry into the accounting system. Using the accrual basis method, expenses are recognized when they occur, rather than when they are paid. This also includes making month-end entries for all expenses that happened during the month for which an invoice was not received during the month. Month-end entries are part of the accounting "close" process to settle the accounting activity for the month.
-
Combined Method
-
While most companies prefer to use the cash basis for reporting their taxes, they may elect to use the accrual basis when it comes to the accounts payable and receivables departments. This allows them to recognize all expenses in the month they happened rather than waiting for invoices to show up. This also helps reduce their tax liability at the end of the year. They may also choose to recognize all income for the business at the time it happens, rather than when they received payment for services.
Monthly Accruals
-
Using the combined or accrual method, the accounts payable clerk or accountant must make a list of all expenses that happened during the month for which a bill has not been received. This may include rent, utilities, vendor payments, employee expense reimbursements and more. The clerk or accountant uses a spreadsheet to list these items separately for entry into the accounts payable system. Each item is debited against the appropriate expense account, while the offset or credit amount goes to the company’s accrual account. All of these transactions reverse at the beginning of the next month and are re-accrued if the invoice does not come in. Accruals occur during the month-end close process.
-
References
- Photo Credit Jupiterimages/Comstock/Getty Images
