Accounts Payable

When a company orders and receives goods (or services) in advance of paying for them, we say that the company is purchasing the goods on account or on credit. The supplier (or vendor) of the goods on credit is also referred to as a creditor. If the company receiving the goods does not sign a promissory note, the vendor's bill or invoice will be recorded by the company in its liability account Accounts Payable (or Trade Payables).

As is expected for a liability account, Accounts Payable will normally have a credit balance. Hence, when a vendor invoice is recorded, Accounts Payable will be credited and another account must be debited (as required by double-entry accounting). When an account payable is paid, Accounts Payable will be debited and Cash will be credited. Therefore, the credit balance in Accounts Payable should be equal to the amount of vendor invoices that have been recorded but have not yet been paid.Under the accrual method of accounting, the company receiving goods or services on credit must report the liability no later than the date they were received. The same date is used to record the debit entry to an expense or asset account as appropriate. Hence, accountants say that under the accrual method of accounting expenses are reported when they are incurred (not when they are paid).The term accounts payable can also refer to the person or staff that processes vendor invoices and pays the company's bills. That's why a supplier who hasn't received payment from a customer will phone and ask to speak with "accounts payable."The accounts payable process involves reviewing an enormous amount of detail to ensure that only legitimate and accurate amounts are entered in the accounting system. Much of the information that needs to be reviewed will be found in the following documents:

purchase orders issued by the company

receiving reports issued by the company

invoices from the company's vendors

contracts and other agreements

The accuracy and completeness of a company's financial statements are dependent on the accounts payable process. A well-run accounts payable process will include:

the timely processing of accurate and legitimate vendor invoices,

accurate recording in the appropriate general ledger accounts, and

the accrual of obligations and expenses that have not yet been completely processed.

The efficiency and effectiveness of the accounts payable process will also affect the company's cash position, credit rating, and relationships with its suppliers.

Convention of Consistency

The convention of consistency signifies that the accounting practices and methods should remain consistent (unchanged) from one accounting year to another. In other words, accounting practises should remain the same from one period to another. Comparison of results from one period to another is possible only when same accounting rules are followed. For example, if a concern adopts Reducing Instalment method of depreciation in one year and Straight Line Method of depreciation in another year, then it will be difficult to make comparison between the results of the two periods. Sometimes, wrong conclusions may be drawn. If change becomes necessary the change and its effect should be stated clearly.

Accrual Concept

Business transactions are recorded when they occur and not when the related payments are received or made. This concept is called accrual basis of accounting and it is fundamental to the usefulness of financial accounting information.

Objective Evidence Concept

The verifiable objective evidence concept states that all accounting transactions should have evidence and must be supported by business documents and vouchers.

Realisation Concept

The realization concept and convention is an important concept in accounting. It basically means that accounts recognize transactions and any profits arising from it at the point of sale or transfer of legal ownership. They do not just recognize the transactions when cash exchanges hands, but also when the transaction occurs at the point of sale, and this is when the transaction becomes legal, as it does not just become legal when the money is transferred. Therefore if a big client of yours just sign a business contract, it can be realised as a legal transaction. Even though you might receive cash months later, the contract here act as a confirmation that the sales will occur and therefore the realisation concept here allows the creation of such transaction.

Matching Concept

The matching concept is an accounting principle that requires the identification and recording of expenses associated with revenue earned and recognized during the same accounting period. Accordingly, under the matching concept the expenses of a particular accounting period are the costs of the assets used to earn the revenue that is recognized in that period. It follows, therefore, that when expenses in a period are matched with the revenues generated for the same period, the result is the net income or loss for that period.

Accounting Period Concept

Even though it is assumed that business will continue to exit for a long time, it is necessary to keep accounts in such a manner that the results are known at frequent intervals. Generally business concern adopt twelve months period for measuring the income of the concern.

This time interval is called 'Accounting Period'. At the end of each accounting period an Income and Expenditure Account and Balance Sheet are prepared. The Income and Expenditure Account disclose the income or loss sustained by the business during the accounting period. Similarly balance sheet reveals the financial position of the business on the last day of accounting period.

Truly speaking, the measurement of income or loss of a business entity is relatively simple on a whole life basis. A complete and accurate picture of the degree of success achieved by a business unit cannot be obtained until it is liquidated, converts its assets into cash and pays off its debts. On liquidation, it is possible to determine with finality its net income. But the owners, the investors and overall the Government, all are impatient and don not want, until the dissolution of the concern, to know what has been the results of the business activities. All these persons are interested in regular reports and accounts at proper intervals to know "how things are going?" This means that the final accounts must be prepared on a periodic basis rather than waiting till the business is terminated.

Dual Aspect Concept or Accounting Equivalence Concept

This is the basic concept of accounting. According to this concept, every financial transaction involves a two-folded aspect, (a)yielding of a benefit and (b) the giving of that benefit. For example, if a business has acquired an asset, it must have given up some other asset such as cash or the obligation to pay for it in the future. Thus a giver necessarily implies a receiver and a receiver necessarily implies a giver. There must be a double entry to have a complete record of each business transaction, an entry being made in the receiving account and an entry of the same amount in the giving account. The receiving account is termed as debtor and the giving account is called creditor. Thus every debit must have a corresponding credit and vice versa and upon this dual aspect has been raised the whole superstructure of Double Entry System of Accounting. 

The Accounting Equation, (i.e., Assets=Equities(or Liabilities+Capital) is based on dual aspect concept.

The term 'Assets' denotes the resources owned by the business while the term 'Equities' denotes the claims of various claimants including the proprietors of the business against the assets.

Cost Concept

A concept of accounting, closely related to the going concern concept, is that an asset is recorded in the books at the price paid to acquire it and that this cost is the basis for all subsequent accounting for the asset. This concept does not mean that the asset will always shown at cost but it means that cost becomes basis for all future accounting for the asset. Asset is recorded at cost at the time of its purchase but is systematically reduced in its value by charging depreciation. The market value of an asset may change with the passage of time, but for accounting purpose it continues to be shown in the books at its book value, i.e., the cost at which it was purchased minus depreciation provided up to date.

Going Concern Concept or Continue of activity concept

It is assumed that a business unit has a reasonable expectation of continuing business at a profit for an indefinite period of time. A business unit is deemed to be a going concern and not a gone concern. It will continue to operate in the future. Transactions are recorded in the books keeping in view the going concern aspect of the business unit. 

Money Measurement Concept

Money Measurement Concept

Money is the only practical unit of measurement that can be employed to achieve homogeneity of financial data, so accounting records only those transactions which can be expressed in terms of money though quantitative records are also kept. 

Business Entity Concept

Business Entity Concept

This concept implies that a business unit is separate and distinct from the person who supply capital to it. Irrespective of the form of organisation, a business unit has got its own individuality as distinguished from the persons who own or control it.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES(GAAP) (CONCEPTS, CONVENTIONS AND POLICIES)

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES(GAAP)

(CONCEPTS, CONVENTIONS AND POLICIES)

Accounting is the language of business. To make the language convey the same meaning to all people all over the world have developed certain rules, procedures and conventions, which represent a consensus view by the profession of good accounting practices and procedures and are generally referred to as Generally Accepted Accounting Principles(GAAP).

Accounting principles can be classified into two categories

1.Accounting concepts, and 

2.Accounting conventions

1.Accounting Concepts

Accounting concepts may be considered as postulates i.e., basic assumptions or conditions upon which the science of accounting is based. There is no authoritative list of these concepts but most of the following concepts have fairly general support.

Various accounting concepts are as follows

a.Business Entity

b.Money measurement

c.Going concern

d.Cost

e.Dual Aspect

f.Accounting period

g.Matching

h.Realisation

i.Objective Evidence

j.Accrual

2.Accounting Conventions

The term 'convention' denotes circumstances or traditions which guide the accountants while preparing the accounting statements.

Various accounting conventions are as follows.

a.Consistency

b.full disclosure

c.conservatism

d.materiality