How To Calculate Accounts Payable?

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Therefore, accounts payable also known as trade credit refers to the amount of money that a business has borrowed from its suppliers to acquire goods or services. Accounts payable is also an essential aspect of a business since it helps in determining the cash flow and the overall financial performance of a company. In this article, you will learn how to perform the following steps to calculate accounts payable.

1. Identify Your Accounts Payable

The first step in the process is to collect all the data regarding the suppliers and vendors your business has paid some amount to but has not fully paid. These may include:

- Raw materials and inventory are some of the key inputs that the material suppliers provide.
- Electricity, gas, water, and so on are examples of essential services that a typical household or business establishment would require.
- Newspapers, magazines, radio, and television stations for conveying the message about services.
- IT and software service providers are those who sell software or provide software solutions.
- Some of the key players in the industry include equipment rental and leasing corporations.
- The employed persons who are not permanently on the payroll of an organization

Ransack receipts, invoices issued, check registers, and accounting ledger to compile a list of all suppliers to whom you are currently indebted.

2. Review Invoice Due Dates

Then, gather the invoices of all the payables you recognized earlier in the process. Check out the due date for each invoice and the payment terms that the company has agreed to. This will assist you in understanding the date you have to make this payment, and how much interest or penalty you are likely to be charged for delayed payment.

Additionally, accrue any remaining amounts against the invoice and also clear with any part payments made earlier. This will result in giving the true amount outstanding in each invoice that is still unpaid.

3. Calculate Total Outstanding Amount

The following is the accounts payable calculation Now we have to make the necessary calculation for the accounts payable. In regards to each particular supplier, calculate the total amount of money that is still to be paid concerning all the provided invoices.

For example, you may owe:
- Supplier A – 5,000
- Just as supplier A costs 3,000 pounds supplier B will cost $ 10,000.
- Supplier C is required to pay $12,500.

The total accounts payable is arrived at by summing the total amount owed to all suppliers. In this case, it is one hundred and seven thousand five hundred US dollars.

This calculation can be done and updated using Excel or any accounting software whenever new payables are admitted or payments are made.

4. Calculate Average Payment Period

One of the key AP metrics that can be of value is the AP aging, specifically the average number of days to pay accounts payable. Here’s how to calculate it:

Average Payment Period = 365 days / (Annual Credit Sales / Average Accounts Payable)

For instance, let's assume that your business avails credit purchases worth $840,000 annually. And your average outstanding accounts payable balance is forty-two thousand dollars.

The average days to receive payment = Total number of days ÷ total receipts = 365 ÷ ($840000 ÷ $42,000) = 45 days

This tells you that on average your business will take 45 days to clear the bill from the suppliers once they send the invoices.

Compared with industry standards on how many days it takes to fill a position, you get to find out whether 45 days is optimal or excessive. Payments can be made at any time of the year but this depends on the type of business and contracts made with suppliers.

5. Prioritize Payables

Since accounts payable are a part of working capital, there are very few firms that have adequate cash available to pay off all the due amounts. That is why payments have to be a priority at all times as well if businesses wish to survive in the modern world.

The first type of payment to make is invoices that are almost due for payment since this will prevent customers from charging extra fees. Also, pay the suppliers, particularly the significant or several few ones, first to guarantee steady supplies for your operations. Due to the bargaining power of buyers, the small vendors can accept the deferred payments.

Make use of the above steps and the accounts payable aging reports to plan the correct sequence of clearing the payables. It is important to regularly communicate with vendors regarding the expected payment dates.

Hence, correct AP calculation allows smart cash planning and subsequent cash flow management.

There are various ways and means through which payables can be managed effectively to ensure that the cash flow of a business is healthy; one of them is that payables should be calculated and analyzed frequently in terms of payment cycles. If accounts payable are increasing every month, it is time to manage expenditure and financing of procurement more effectively. A company’s future working capital requirements are also determined, thus, avoiding future problems of liquidity. Therefore, it can be concluded that accounts payable calculations, though they might be considered as mere arithmetical computations, contain information of potential interest to enterprises.

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