What Could Cause Accounts Payable to Be Understated?

Accounts payable on a company's balance sheet represents amounts owed to other parties for invoices received. While you try your best to ensure that the accounting records are correct, mistakes sometimes happen. An understatement of accounts payable can make it appear that you have more resources available to pay creditors than you actually do. Understanding the most common ways that accounts payable becomes understated can help you be vigilant and ensure that your records are as accurate as they can be.

The most common way that accounts payable becomes overstated is when the company neglects to record bills received. This can happen in a couple of ways. First, the supplier may send a bill to the wrong department or section of the company. To mitigate this risk, you should have a policy in place that directs employees to remit all invoices received to a central person or department. Additionally, a bill may simply not make it into the system. Missing bills can be identified by using a purchase requisition form for all purchases. If purchases must be approved by management, then management can let the accounting department know to expect a bill. If the bill isn't in the system after a reasonable amount of time, an accrual can be made until you can sort out the problem and record the invoice as accounts payable.

As your small business grows, it can be harder to know everything about every dollar that leaves the company. At some point, you are bound to have other employees making purchasing decisions. In this case, ask employees at the end of the year if they have purchased goods or contracted for services that they have not yet been billed for. Employees may not understand that the date that services or goods are received is important from an accounting standpoint. In addition, if your company uses a purchase requisition system or requires approval for purchases, you can look through these documents for any items that look like they have been received before the end of the year. If title for the goods purchased passes to the company before the end of the accounting period or services are received, but payment has not been remitted to the supplier or service provider, accounts payable should be recorded.

Companies that have long-term liabilities related to trade goods, such as some financing agreements for inventory purchases, must be diligent to make sure that these liabilities are classified correctly. In many cases, there is a short-term and long-term portion of the company's obligation. The short-term portion, which is the amount due within a year of the financial statement date, should be recorded as accounts payable in the current liabilities section of the balance sheet. The long-term portion should be recorded as "accounts payable, long-term" in the long-term liabilities section of the balance sheet. If a company neglects to break apart the current portion of the liability from the long-term portion, accounts payable will be understated.

Many companies have both an accounts payable and an accrued expense account in the current liabilities section of the balance sheet. The difference between these accounts is subtle, but if an account payable is classified as an accrued expense, accounts payable will be understated while accrued expense will be overstated. The difference in the two accounts relates to whether the bill has been received for the service. If a service has been received, but the bill has not, then the expense should be accounted for as an accrued expense. Once the invoice has been received, the accrued expense should be reversed and the account payable recorded.