How To Audit Accounts Payable?

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It always seems like business finances are complex and confusing with all the terms like expenses, accounts payable, accrued expenses, and more, that is why one can easily get confused in their difference. In this article, we will demystify and provide an answer to the question as to whether expenses are a form of accounts payable.

What are Expenses?

This is the amount of money that a business entity spends daily on its operations. Some common examples include:

- Cost of sales - The expenses which relate specifically to the manufacture and selling of products by an organization. This comprises material costs, direct wages, and direct factory expenses such as power usage, rents, taxes, and depreciation.

- Rent – Sum which is paid periodically for the use of property, equipment, or some other facility.

- Maintenance of infrastructures and other facilities - Expenses incurred in maintaining such structures and amenities as power, light, gas, water, etc.

- Employee wages and salary The following is a breakdown of all the employee’s wages and salaries that has to be paid for in the financial year.

- Supplies and stationaries

- T&E Recovery comprises of travel expenses, entertainment expenses, and the cost of meals.

- This component embraces all the expenses incurred in advertising and promotion of the company’s products.

- Repairs and maintenance

- Insurance

- Depreciation – A method in accounting, used to provisionally expense the acquisition cost of fixed assets over their economic usefulness.

Strictly, any cost incurred in the performance of the core activities of a business organization is an expense. Expenses are recognized when they occur, which means that they are recorded and linked to the period in which such expenses were useful in generating revenue. This makes it easier to determine a company’s actual profits or losses during a specific period.

What are Accounts Payable?

Accounts payable is special in that it strictly involves the money a business owes to creditors and suppliers. This is usually recorded as a negative figure on the balance sheet for the company in question. Accounts payable consist of:

- Accounts receivable to suppliers of products and services

- Accounts payable – short-term liabilities for goods, stock, machines, etc. purchased on credit

- Accrued expenses – expenses the company has incurred and knows it has to pay in the future but has not yet received the invoice for.

Whereas expenses are assets that are used up in the business operations, accounts payable is actual unpaid amounts that are still legally owed to others. This is important since accounts payable are an essential part of a business that needs to be well managed to avoid upsetting a supplier or having a bad credit rating.

To summarize – accounts payable are a subset of expenses, but expenses can also include other items. Expense is a broader concept than cost, and some of it is paid out immediately as the business undertakings go on. Accounts payable in particular is a subset of current liabilities which denote the amount of money that has been spent on the purchase of goods and services from other parties and has not yet been paid. It is as simple as that: gaining a clear understanding of these simple accounting terms helps in managing the finances a lot better!

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