Payables in Accounting is a huge deal. In many ways, they can the lifeblood of many a business.

Every business survives based on the amount of money that comes in minus the money that goes out. If the amount that comes in is higher than the amount that goes out than that business survives. If not, then it doesn’t survive.

Payables in Accounting is all about tracking what comes in.

So what is the technical definition of payables in accounting?

Accounts payable (also known as creditors) are balances of money owed to other individuals, firms or companies. These are short term obligations which come into existence when a sole proprietor, firm or company purchases goods or services on account. Accounts payable usually appear as the first item in the current liabilities section of a company’s balance sheet.

Accounts payable are usually divided into two categories – trade accounts payable and other accounts payable. Trade accounts payable are the obligations for the purchase of goods that are merchandise inventory whereas other accounts payable are the obligations for the purchase of services and goods that are not merchandise. Merchandise are the commodities that a company normally deals in. The goods that are not merchandise are the goods that the company does not normally deals in.

Mostly, the companies find it convenient to record accounts payable liability when the goods are actually received by them. However, in certain situations where the title to goods passes before the actual receipt of goods, the liability should be recorded at the time of passage of title.

Journal entries related to accounts payable

Every time the goods or services are purchased on account, an accounts payable liability is created and recorded. The measurement of the amount of accounts payable liability is not difficult because the seller’s invoice usually contains the detailed information about the due date and the exact amount payable by the buyer.

The transactions relating to accounts payable are repetitive in nature and many companies use a special journal known as purchases journal for recording these transactions. However, in small companies where the transaction volume is small, special journals are not maintained and these transactions are recorded in general journal along with other transactions.

The typical journal entries related to accounts payable are given below:

1. When merchandise inventory is purchased on account:

If merchandise inventory is purchased on account, the accounts payable liability is recorded by making the following journal entry

Purchases account [Dr.]
Accounts payable [Cr.]

The above journal entry to record accounts payable liability is made under periodic inventory system. If the company uses a perpetual inventory system the debit part of the entry would consist of “inventory account” rather than “purchases account”.

2. When damaged or otherwise undesirable inventory is returned to the supplier:

If a part or whole of the inventory purchased is found to be damaged or otherwise undesirable, the buyer may either return it to the seller or keep the damaged goods and ask the seller for an allowance (i.e., a reduction in price). If the returns or allowances are approved by the seller, the buyer reduces accounts payable liability in his accounting record.

The following journal entry is made to record the reduction in accounts payable liability resulting from approved returns and/or allowances:

Accounts payable [Dr.]
Purchases returns and allowances [Cr.]

If the buyer maintains a purchases returns and allowances journal, the goods returned by him would be recorded in that journal rather than in general journal.

3. When an asset other than merchandise inventory is purchased on account:

If an asset other than inventory such as plant, equipment, tools, furniture or some other fixed asset is purchased on account, the accounts payable liability is recorded as follows:

Relevant asset’s account [Dr.]
Accounts payable account [Cr.]

4. When expenses are incurred or services are purchased on account:

If some professional services (such as market and legal services etc.) are acquired or expenses are incurred and the payment for them is to be made in future, the accounts payable liability arises which is recorded by making the following journal entry:

Relevant expense [Dr.]
Accounts payable account [Cr.]

5. When the payment is made to a creditor or payable:

When the payment is made to payable or creditor, the accounts payable liability reduces which is recorded by making the following journal entry:

Accounts payable [Dr.]
Cash [Cr.]


The Chicago Corporation engaged in the following transactions during the month of January.

  • Jan 01: Purchased $80,000 of inventory, terms 2/10, n/30, FOB shipping point. Paid freight costs of $600.
  • Jan. 02: Returned damaged goods to supplier and received a credit of $12,000.
  • Jan. 09: Paid cash to supplier for inventory purchased on January 1.

Required: Prepare all necessary journal entries assuming the Chicago uses a periodic inventory system and gross method of accounting for purchases discounts.


via Accounts payable – explanation, journal entries, examples …

What Is Days Payable Outstanding – DPO?

Days payable outstanding (DPO) is a financial ratio that indicates the average time (in days) that a company takes to pay its bills and invoices to its trade creditors, which include suppliers, vendors or other companies. The ratio is calculated on a quarterly or on an annual basis, and it indicates how well the company’s cash outflows are being managed.

A company with a higher value of DPO takes longer to pay its bills, which means that it retains the available funds for a longer duration. It may allow the company an opportunity to utilize the available cash in a better way to maximize the benefits.

Key Takeaways

  • Days payable outstanding (DPO) is a financial ratio that indicates the average time (in days) that a company takes to pay its bills and invoices.
  • Companies having high DPO can use the available cash for short-term investments and to increase their working capital and free cash flow.
  • However, higher values of DPO, though desirable, may not always be a positive for the business.

The Formula for Days Payable Outstanding Is

DPO=Accounts Payable×Number of DaysCOGSwhere:COGS=Cost of Goods Sold  =Beginning Inventory+P−Ending Inventory\begin{aligned} &\text{DPO} = \frac{\text{Accounts Payable}\times\text{Number of Days}}{\text{COGS}}\\ &\textbf{where:}\\ &\text{COGS}=\text{Cost of Goods Sold} \\ &\qquad\ \ \, \,= \text{Beginning Inventory} + \text{P} -\text{Ending Inventory}\\ &\text{P}=\text{Purchases} \end{aligned}​DPO=COGSAccounts Payable×Number of Days​where:COGS=Cost of Goods Sold  =Beginning Inventory+P−Ending Inventory​

How to Calculate DPO

To manufacture a saleable product, a company needs raw material, utilities, and other resources. In terms of accounting practices, the accounts payable represents how much money the company owes to its supplier(s) for purchases made on credit.

Additionally, there is a cost associated with manufacturing the saleable product, and it includes payment for utilities like electricity and for employee wages. This is represented by cost of goods sold (COGS), which is defined as the cost of acquiring or manufacturing the products that a company sells during a period (COGS = Beginning Inventory + Purchases – Ending Inventory). Both these figures represent cash outflows and are used in calculating DPO over a period of time.

The number of days in the corresponding period is usually taken as 365 for a year and 90 for a quarter. The formula takes account of the average per day cost being borne by the company for manufacturing a saleable product. The numerator figure represents payments outstanding. The net factor gives the average number of days taken by the company to pay off its obligations after receiving the bills.

Two different versions of the DPO formula are used depending upon the accounting practices. In one of the versions, the accounts payable amount is taken as the figure reported at the end of the accounting period, like “at the end of fiscal year/quarter ending Sept. 30.” This version represents DPO value “as of” the mentioned date.

In another version, the average value of Beginning AP and Ending AP is taken, and the resulting figure represents DPO value “during” that particular period. COGS remains the same in both the versions.

Days Payable Outstanding

What Does Days Payable Outstanding Tell You?

Generally, a company acquires inventory, utilities, and other necessary services on credit. It results in accounts payable (AP), a key accounting entry that represents a company’s obligation to pay off the short-term liabilities to its creditors or suppliers. Beyond the actual dollar amount to be paid, the timing of the payments – from the date of receiving the bill till the cash actually going out of the company’s account – also becomes an important aspect of business. DPO attempts to measure this average time cycle for outward payments and is calculated by taking the standard accounting figures into consideration over a specified period of time.

Companies having high DPO can use the available cash for short-term investments and to increase their working capital and free cash flow. However, higher values of DPO may not always be a positive for the business.

If the company takes too long to pay its creditors, it risks jeopardizing its relations with the suppliers and creditors who may refuse to offer the trade credit in the future or may offer it on terms that may be less favorable to the company. The company may also be losing out on any discounts on timely payments, if available, and it may be paying more than necessary.

A high value of DPO can be beneficial if the company is running short of cash. A high DPO also helps if the company is better off in delaying the payments than making them on time and then loaning the money by paying interest to continue its business operations. Companies must strike a delicate balance with DPO.

Additionally, a company may need to balance its outflow tenure with that of the inflow. Imagine if a company allows 90-day period to its customers to pay for the goods they purchase but has only 30-day window to pay its suppliers and vendors. This mismatch will result in the company being prone to cash crunch frequently.

DPO value varies widely across the different industry sectors, and it is not worth comparing the value for different sector companies. A company’s management will compare its DPO to the average within its industry to see if it is paying its vendors too quickly or too slowly. Depending upon the various global and local factors, like the overall performance of economy, region, and sector, plus any applicable seasonal impacts, the DPO value of a particular company can vary significantly from year to year, company to company, and industry to industry.

DPO value also forms an integral part of the formula used for calculating the cash conversion cycle (CCC), another key metric that expresses the length of time that a company takes to convert the resource inputs into realized cash flows from sales. While DPO focuses on the current outstanding payable by the business, the superset CCC follows the entire cash time-cycle as the cash is first converted into inventory, expenses and accounts payable, through to sales and accounts receivable, and then back into cash in hand when received.

Example of How Days Payable Outstanding Is Used

The leading retail corporation Walmart Inc. (WMT) had accounts payable worth $46.09 billion and cost of goods sold worth 373.4 billion for the fiscal year 2018. These figures are available in the annual financial statement and balance sheet of the company. Taking the number of days as 365 for annual calculation, the DPO for Walmart comes to [ 46.09 / (373.4/365) ] = 45.05 days.

Similar calculations for technology leader Microsoft Corp. (MSFT) which had $8.62 billion as AP and $38.97 billion as COGS leads to DPO value of 80.73 days.

It indicates that during the fiscal year ending 2018, Walmart paid its invoices in around 45 days after receiving the bills, while Microsoft took around 80 days, on an average, to pay its bills.

A look at similar figures for the online retail giant Inc. (AMZN), which had AP of $34.62 billion and COGS of $111.93 billion for the fiscal year 2017, reveals a very high value of 112.90 days. Such high value of DPO is attributed to the working model of Amazon, which roughly has 50 percent of its sales being supplied by third-party sellers. Amazon instantly receives funds in its account for sale of goods which are actually supplied by third-party sellers using Amazon’s online platform.

However, it doesn’t don’t pay the sellers immediately after the sale, but may send accumulated payments based on a weekly/monthly or threshold-based payment cycle. This working mechanism allows Amazon to hold onto the cash for a longer period of time, and the leading online retailer ends up with a significantly higher DPO.

Limitations of DPO

While DPO is useful in comparing relative strength between companies, there is no clear-cut figure for what constitutes a healthy days payable outstanding, as the DPO varies significantly by industry, competitive positioning of the company, and its bargaining power. Large companies with a strong power of negotiation are able to contract for better terms with suppliers and creditors, effectively producing lower DPO figures than it would have otherwise.

via Days Payable Outstanding – DPO Definition


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