Why overstate accounts payable

In many cases, there is a short-term and long-term portion of the company's obligation. The short-term portion, which is the amount due within a year of the financial statement date, should be recorded as accounts payable in the current liabilities section of the balance sheet.

The long-term portion should be recorded as "accounts payable, long-term" in the long-term liabilities section of the balance sheet. If a company neglects to break apart the current portion of the liability from the long-term portion, accounts payable will be understated. Many companies have both an accounts payable and an accrued expense account in the current liabilities section of the balance sheet.

The difference between these accounts is subtle, but if an account payable is classified as an accrued expense, accounts payable will be understated while accrued expense will be overstated.

The difference in the two accounts relates to whether the bill has been received for the service. If a service has been received, but the bill has not, then the expense should be accounted for as an accrued expense. Once the invoice has been received, the accrued expense should be reversed and the account payable recorded.

John Freedman's articles specialize in management and financial responsibility. He is a certified public accountant, graduated summa cum laude with a Bachelor of Arts in business administration and has been writing since His career includes public company auditing and work with the campus recruiting team for his alma mater. However, because the same overstated accounts receivable has been also included in the net income calculation, the net effect of overstating accounts receivable on cash flow is actually zero.

An investment and research professional, Jay Way started writing financial articles for Web content providers in He has written for goldprice. By Jay Way. Uncollectible Accounts Receivable Companies overstate their accounts receivable when they choose not to exclude from total outstanding accounts receivable the amount of potentially uncollectible accounts of certain customers.

Understated Bad Debt Any uncollectible accounts receivable are unpaid debt by customers and constitute a bad debt expense for the company. Unaffected Cash Flow Companies sometimes refer to accounts receivable for cash flow calculation. Accounts payable overstatement causes inaccurate reporting of financial statements resulting in inaccurate income statement profit and loss and balance sheet as a whole.

There are various data errors that render accounts payable to overstated. These can be corrected by determining the cause of overstatement. Incorrect inventory input and cost of goods sold is likely source of overstatements of accounts payable. When purchases are made on credit, accounts payable are created.

Further, discrepancies may occur when the company records all inventory transactions without correctly following inventory valuations.

The accountant shall correctly record the purchases on 1 st Dec, However, due to confusion surrounding the dates, he records on 12 th Jan This will overstate the accounts payable balance for the year This will overstate the accounts payable balance for Jan month and understate the balance for the December month.

The inventory was received as usual and accounted for. In the books of Mr.