In our previous blog, the second in our Reading Financial Statements Series we introduced you to Receivables.
In the next few blogs we will explore some more typical association balance sheet accounts in more detail.
Accounts Payable and Accrued Expenses
By Jeremy Newman, CPA
A payable is something the association owes to another entity or person. It is a liability of the association.
What causes a payable to occur?
Generally, accounts payables are recorded when an association has received goods or services, and the related vendor invoice, but has not yet paid the invoice.
What is your accounting basis?
In other articles and blogs, we have referred to the basis of accounting. This is very important for readers of financials to understand. To recap:
- Cash basis: Revenues recorded when cash is received, expenses recorded when paid.
- Accrual basis: Revenue recorded when earned/billed, expenses recorded when incurred.
By definition, when using the cash basis of accounting, an association will not record a vendor expense until an invoice is paid. What happens if a contract landscape invoice is submitted to the association for payment, but the invoice is not paid until the next month? The association will not record landscape expense in the current month under the cash basis of accounting. If an association uses the accrual basis of accounting, the landscape vendor invoice will be recorded as a payable, with a corresponding charge to landscape expense in the current month. The expense is recorded together with the liability to pay for the expense.
Are accrued expenses different from accounts payable?
Yes, technically accrued expenses are different, however the financial statement presentation is similar. Typical accruals are recorded for expenses like utilities. Perhaps the utility company bills the association every two months. At the end of month one, even though an invoice had not been received, the association should accrue one month of utility expense so that the financial statements present a reasonable estimate of the expense for the current month. If the association waited until it received the invoice for two months, it would be recording two months of expense in one month and zero expense in one month under the cash basis.
Full Accounting and Knowledge
We believe the full accrual basis of accounting provides associations and readers of financial statements with a more complete and accurate representation.
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