Understanding the Key Differences Between Accruals and Payables
Both accruals and payables have a significant impact on the company’s net income and accountants’ reports, but their reporting and presentation in balance sheets differ. Accruals reflect future expenses that have not yet occurred, but which the company expects to pay shortly. Thus, accruals usually include payroll, rent, taxes, services, insurance, some types of dividends, commissions, wages, and other similar payments.
In their turn, payables represent payments to suppliers and creditors who have already provided services or goods to the company but have not yet been reimbursed (Scott, 2021). Payables are associated with short-term debts, transportation, rent, raw materials, leasing, and other accounts.
Financial Reporting Implications of Accruals vs. Payables
If accruals and payables are not correctly represented in a company’s balance sheet, it can lead to incorrect forecasts and unreliable profit indicators for investors and shareholders. These adjustments should be made each time the balance sheet of a company is updated and revised (Gültekin et al., 2022).
Adjustments to Accruals and Payables: Timing and Procedures
In accrual accounting, both methods are typically used, and there is no preferred or more accurate method for calculating accruals and payables, as both approaches can lead to correct results if they are appropriately utilized and accountants effectively report accrued expenses and accounts payable.
Ethical Considerations in Accrual Accounting
Regarding ethical considerations related to accrual calculations and their effects on a company’s financial reporting, the main principle is that the reporting should be complete, on time, accurate, and reliable. Accrual-based calculations may raise ethical concerns about manipulating a company’s financial statements. For example, a company may delay paying its debts to improve its financial statements and show higher returns.
However, such actions may lead to a breach of agreements with suppliers and negatively affect the reputation of the company. Companies must adhere to ethical principles in their calculations by accrual and their impact on financial reporting. Accruals and payables should be presented accurately and consistently so that investors and shareholders can make active and informed investment decisions.
References
Gültekin, M. N., Guerard, J. B., & Saxena, A. (2022). Quantitative corporate finance. Springer International Publishing.
Scott, P. (2021). Introduction to accounting. Oxford University Press.