How to Calculate Accounts Payable

In order to increase the existing levels of company performances, the accounts payables can be considered as an important factor. Building good relationships with the suppliers is helpful to increase their sales and profits. In this article, we will identify the ways in which the accounts payable entries are recorded in the accounting systems and how to calculate accounts payable. Following sections elaborate the double entry principles related with the creditors and the formulas used to calculate the creditor’s payment period.

Accounts Payable

When a company buys raw materials from their suppliers on credit terms, it is recorded in books as account payables / creditors. If the company does not pay within the given period, it needs to pay penalties or interest payment additionally to the purchase value of goods. Buying goods for credit from suppliers creates advantage for the organizations as they can invest that amount of cash to gain additional profit. Therefore, in the organizational perspective they try to lengthen the credit period offered to them, and the suppliers try to shorten the payment terms they offered to the buyers . Anyway, it is better to settle the suppliers credit on time in order to build good relationships and to work with them for a longer time period. It again affects financial stability of the company which reflects on the current ratio. Current ratio elaborates the organization’s possibility of recovering their current liabilities with their current assets. When external parties are buying shares, they consider the company’s financial stability within the industry. They would consider about the performance of the company compared to previous years.

Accounting for Payables

Trade payables are included in the balance sheet under current liabilities as the payments are due to be settled within a year. There can be different kinds of payables like dividends payable, accrued expenses and payroll expenses, and they are recorded separately in order to identify them easily. The double entry for credit purchases can be recorded as follows:

When accounting for trade payables, it is recorded in the accounts payable account as a credit and debit to the account expense account. 

When the amount is settles by the creditor, it can be recorded as below:

The payment period offered to its customers can be measured using the accounts payable days formula as illustrated below: 

Accounts Payables Turnover = (Credit Purchases)/(Average accounts payables)*365 days

Using the above Accounts Payabl days Formula, the allowed days for the cash payments can be calculated and by paying earlier than the given time period, would be helpful to achieve the ultimate goals of the organization. It would be useful to build trust between different suppliers and then they would agree to supply bulk quantities for credit with -he long term relationship with them.