Saturday, October 26, 2013

Accounts Payable, Provisions and Accounts Payable Law & Legal Definition

Accounts Payable

Accounts payable are liabilities to pay for goods or services that have been received and have been invoiced or formally agreed with the supplier. Accounts payable (also known as creditors) are amounts owed by an Agency toother entities for goods or services received prior to the end of the reporting period. These obligations are reported as financial liabilities in the Balance Sheet.

information reported on accounts payable allows users of financial statements to assess the quantum of an Agency’s debts and its ability to pay these debts as and when they fall due. Such information also allows Agency management to monitor and control these outstanding obligations more effectively.

Treasurer’s Directions Section A3.1 provides further instruction and guidance relating to the definition, recognition and classification of liabilities.

Accounts payable are to be recognised and recorded in the books of an Agency at fair value when goods or services have been received and invoiced.

Under accrual accounting, a liability in relation to the purchase of goods or services is recognised when it is probable

that an outflow of resources embodying economic benefits will be required in the future to settle the obligation, and the value of the liability can be measured reliably. However, a liability would not be raised where the goods or services have already been paid for (paid in advance).

Recognition of accounts payable will normally occur when the goods or services are invoiced and received by an Agency. It is at this point that it is probable that the Agency will have to make payments to the supplier, and in most cases the amount  of goods or services is stated in an invoice (that is, the amount can be measured reliably). Accounts payable will initially be recorded at fair value (invoice amount), while such liabilities will subsequently be measured at amortised cost,
which equates to cost (for example, invoice amount less any part payment made)

The purchase of goods or services on credit allows an Agency to delay payment for the goods or services for some specific length of time as agreed by the supplier. Regardless, a liability would still be recognised when the goods or services have been received and invoiced by an Agency, rather than when cash payments are made.

Accounts payable are recognised inclusive of the amount of Goods and Services Tax (GST). This is because the total amount of the transaction as represented by the invoiced or contracted price is the amount that will be paid by an Agency. Additional information and guidance regarding GST policy may be found in Treasury GST Circulars.

In some cases an Agency may receive trade discounts on goods or services purchased from a supplier. A trade discountis a reduction provided to an Agency from the normal list price and is used to determine the actual invoice price charged to an Agency. In this situation, only the net amount of an invoice is recognised asaccounts payable. This is in contrast todiscounts offered by suppliers for early payment which will only be accounted for when an Agency actually takes advantage of such discounts.

In addition, an Agency may receive credit notes from a supplier that adjust previous purchase transactions, for example, for overpaid invoices or damaged goods. The balance of outstanding accounts payable should reflect the actualobligation after allowing for these adjustments.


International Accounting Standard 37 (IAS 37) defines a provision as “a liability of uncertain timing or amount”.

From the definition of a provision, the first thing to notice is that it is a liability. A liability is a present obligation which arises as a result of some past event or events and it is expected that it will be settled by outflow of economic resources. Therefore, a provision is an obligation which will be settled by outflow of economic resources.

The second important thing to notice about a provision is that it is of uncertain nature. Uncertainty can either pertain to timing or amount. By uncertain timing we mean that the company is not sure at which point of time the obligation will be settled. By uncertain amount we mean that the company is not sure how much of the economic resources will be needed to settle the liability.

Those liabilities which are of uncertain timing and amount are called provisions according to IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Therefore trade payables and accrued expenses are not considered provisions by this IAS 37 because they do not meet the above criteria. They are not uncertain in timing and amount therefore they cannot be classified as provisions.

In some countries the term “provision” is used in the context of “doubtful debts” and depreciation. But IAS 37 does not consider them as provisions because they do not meet the criteria because they are not liabilities.

Provisions should be recognized only if all the following three conditions are satisfied:
  • There is a present obligation
  • Outflow of economic resources will be probable
  • Amount of the obligation can be reasonably estimated
An obligation can be either a legal obligation or constructive obligation. Legal obligation can arise by contract, due to legislation, or by law. Constructive obligation arises from the company’s actions whereby it has indicated that it will accept certain responsibilities and it has created valid expectations in the minds of other parties that it will discharge such responsibilities.

The term “probable” is interpreted to mean “more likely than not”. In other words the chances of outflow of economic resources are more than 50%

Accounts Payable Law & Legal Definition:

Accounts payable is the term used to describe the unpaid bills of a business; the money owed to suppliers and other creditors. The sum of the amounts owed to suppliers is listed as a current liability on the balance sheet. The accounts payable category is, along with accounts receivable, a major component of a business's cash flow. Aside from materials and supplies from outside vendors, accounts payable might include such expenses as taxes, insurance, rent (or mortgage) payments, utilities, and loan payments and interest.

For many small businesses, limited access to capital leaves little room for error in managing cash flow and accounts payable. Mismanaging of accounts payable can lead to significant problems with overdue payments. For this reason, it is absolutely essential for entrepreneurs and small business owners to deal with the accounts payable side of the business ledger in an effective manner. Bills left unpaid or addressed in a less than timely manner can snowball into major credit problems; these can easily cripple a business's ability to function.

By making informed projections and sensible provisions in advance, the small business can head off many credit problems before they get too big. Obligations to creditors should be paid off concurrently with the collection of accounts receivable whenever possible. Payment checks should not, however, be dated any earlier than the bills' actual due date. In addition, many small companies will find that their business fortunes will take on a cyclical character; they will need to plan for accounts payable obligations accordingly.

For instance, a small grocery store located near a major factory or mill may experience surges in customer traffic in the day or two immediately following the days on which the neighboring facility pays its workers. Conversely, the store may see a measurable drop in customer traffic during weeks in which the factory or mill is not distributing paychecks to employees. The observant shop owner will learn to recognize these patterns and address the accounts payable portion of his or her business accordingly.

Generally, not all bills will need to be paid at once. Expenses such as payroll, federal, and local taxes, loan installment payments, and obligations to vendors will, in all likelihood, be due at various times of the month. Some—such as taxes—may only be due on a quarterly or annual basis (tax payments should always be made on schedule, even if it means delaying payment to vendors; it is far better to dispute a tax bill after it's been paid than to run the risk of being charged with costly fines). It is important, then, for small business owners to prioritize their accounts payable obligations.

Every business must work to keep a reasonable balance between the money coming into and flowing out of its coffers. This task is especially important for small business owners who often have limited flexibility in dealing with shortfalls of cash. Entrepreneurs who find themselves struggling to meet their accounts payable obligations have a couple of different options of varying levels of attractiveness. One option is to "rest" bills for a short period in order to satisfy short-term
cash flow problems. This basically amounts to waiting to pay off debts until the business's financial situation has improved. There are obvious perils associated with such a stance: delays can strain relations with vendors and other institutions that are owed money, and over-reliance on future good business fortunes can easily launch entrepreneurs down the slippery slope to bankruptcy.

Another option that is perhaps more palatable is to make partial payments to vendors and other creditors. This good-faith approach shows that an effort is being made to meet financial obligations; it can help keep interest penalties from raging out of control. Partial payments should be set up and agreed to as soon as payment problems are foreseen or as early as possible. It is also a good idea to try to pay off debts to smaller vendors in full whenever possible unless there is some clear benefit to be had in making installment payments to them.

Usually, signs of cash flow problems will start to show up well before the company's financial fortunes become truly desperate. One clean sign of cash flow problems is an increase in aged payables. Aged payables are those for which the due date has passed. Bills should never be allowed to "ripen" more than 45 to 60 days beyond the due date unless a special payment arrangement has been made with the vendor in advance. At 60 days, a company's credit rating could be jeopardized;
this could make it harder to deal with other vendors and/or loaning institutions in the future.

Outstanding balances can drive interest penalties way up, and this trend is obviously compounded if many bills are overdue at the same time. Such excessive interest payments can seriously damage a business's bottom line. Explaining to vendors and creditors one's current problems and their planned solutions can deflect ill feelings and buy more time. It is often in the best interest of the vendor or other creditor to keep a fledgling business solvent so that continued business may be done with this client. Some—though by no means all—creditors may be willing to waive, or at least reduce, growing interest charges, or make other changes to the payment schedule.

It is crucial to the success of a small business that accounts payable be monitored closely. Ideally, this aspect of the firm's operations would be supervised by a financial expert (either inside or outside the company) who is not only able to see the company's financial "big picture" but is able to analyze and act upon fluctuations in the company's cash flow. This also requires detailed record keeping of outstanding payables. Reports ought to be checked on a weekly basis, and when payments are made, copies should be filed along with the original invoices and other relevant paperwork. Any hidden costs, such as interest charges, should also be noted in the report. Over a period of time, these reports will start to paint an accurate cash flow picture.

Effective monitoring practices not only ensure that payments are made to vendors in a complete and timely fashion, but also serve to protect businesses against accidental overpayment. These overpayments, which often take the form of overpaying sales and use taxes, can be caused by any number of factors: internal miscommunication, encoding errors, sloppy or inadequate record keeping practices, or ignorance of current tax codes. Internal audits of accounts payable practices can be an effective method of addressing this issue, especially for expanding companies. "As companies grow, owners tend to become less involved in day-to-day operations and relinquish control of some functions to staff," stated Cindy McFerrin in Colorado Business Magazine. "Set up systems and procedures in your company that encourage communication, provide for staying current with tax codes, and lessen the risk of multiple payments and other mistakes. Laying the groundwork for accuracy today can keep you profitable and in control tomorrow."


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