What Happens to a Firm's Net Worth as It Uses Cash to Repay Accounts Payable?
Net worth is your company's value after accounting for both assets and liabilities. One short-term liability listed on the balance sheet is accounts payable. You must pay accounts payable regularly if you want to maintain a positive credit rating for your company and stay in business. At the same time, it is also important to constantly monitor your firm's net worth.
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Accounts Payable
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Accounts payable is what the firm owes suppliers and other vendors who provided products or services to the firm on credit. It is basically the total of unpaid bills. For instance, when the company buys office supplies on credit, the supplier generates an invoice with payment terms (usually due 30 or more days later) and the invoice becomes a payable account.
Paying AP with Cash
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The logical solution to resolving an accounts payable debt is to pay the supplier with a check from your bank account. A check issued from the company’s main bank account reduces the amount of cash available. Cash is a liquid asset listed on the balance sheet. It includes the amounts the company has deposited from revenues, loans and other sources of capital.
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No Net Effect
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The balance sheet shows your assets on the left side and your liabilities on the other. Assets must equal liabilities plus owner’s equity (if any) and assets less liabilities equals net worth. When you reduce the cash account on the asset side to pay an accounts payable debt it also reduces the accounts payable account on the liabilities side of the balance sheet. So it stays in balance — there is no net effect to the firm’s net worth when it pays accounts payable from cash. For example, say the total assets were $40,000 and liabilities were $20,000 for a total net worth of $20,000. If you paid an accounts payable debt for $1,000 the new assets total is $39,000 and liabilities equal $19,000. The net worth per the balance sheet is still $20,000.
Business Reputation
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Though paying accounts payable promptly doesn’t have a net effect on net worth, it does help the company’s reputation. Suppliers gain confidence in your business and report positive information to business credit bureaus when you send cash to cover accounts payable promptly.
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