Accounts Payable and Short Term Liabilities

Chapter 9 Accounts Payable and Short Term Liabilities Accounts payable represent short term obligations to be paid to parish and school vendors/creditors for goods purchased or services provided. Generally, receipt of an invoice for goods or services provided would prompt recording an accounts payable item. An accrued liability would be recorded if an expense has been incurred but whether or not an invoice has been received. Properly recording these obligations when incurred allows the parish/school to make a cash flow plan to ensure these obligations are paid in a timely manner. Accounts Payable and Short Term Liabilities must be disclosed on the Statement of Financial Position in the Liabilities section. The purpose of this policy is to provide guidelines for categorizing, recording and reporting parish and school accounts payable and liabilities and properly disclose the parish s financial obligations on the parish financial statements. See the following chapters: Chapter 14, Expense Recognition and Chapter 15, Payroll as they closely relate to this chapter. Refer to them for additional information. You may also review the Chapter 10, Debt for a discussion regarding long term liabilities. ACCOUNTING POLICY The Archdiocese of Saint Paul and Minneapolis has adopted the accrual method of accounting for recognition of parish and school expenses. The accrual method requires recording expenses when incurred. Accounts payable reflects these accrued expenses without regard to actual timing of the payment of the invoice. The Archdiocese of Saint Paul and Minneapolis has defined a standardized chart of general ledger accounts for use by all parishes and schools. See Chapter 3, Parish/School Chart of Accounts Structure for the listing. SCOPE Accounts Payable Generally, accounts payable obligations are expensed in the period incurred and not when invoices are received. Record the payable as of the date of service or purchase which may not match the invoice date. Accounts payable transactions should be recorded from original invoices and not from vendor statements or packing slips. See journal entry examples # 9-1 and # 9-2 for how to record accounts payable and subsequent payment of invoices that have been recorded in accounts payable. Many accounting software programs automatically make these entries when invoices are entered into or paid out of an accounts payable module. Also, some vendors will charge a penalty, late fee and/or interest if accounts are overdue. Be sure to note these vendors and make timely payments to avoid such charges. In addition, some vendors offer a discount for early payment of CHAPTER 9 ACCOUNTS PAYABLE & SHORT TERM LIABILITIES PAGE 1 OF 5

invoices. In order to maximize cash flow, this option should be utilized if available and cash flow allows for it. Certain types of accounts payable transactions such as payroll taxes, employee share of medical and other benefits, and 403(b) employer and employee contributions must be paid when due in order to satisfy legal obligations. There are serious legal implications for late payment of these obligations. See Chapter 15, Payroll for more information. It is not advisable to prepare checks the parish does not intend to mail immediately. If checks are not mailed as soon as they are prepared, they are more likely to be lost or stolen. It is also more difficult for the parish to track expenses and control payments. For cash flow purposes, best practices suggest periodic review of outstanding invoices using the accounts payable aging report along with current bank balances to determine which invoices could be paid at any given time and which funds will be required for payment. Vendor list management is an important internal control. A parish or school should have a process to add and review new vendors. If possible, the person who processes accounts payable and cuts the check should not also be adding new vendors. If this is not possible, a mitigating control would be a review of new vendors on a monthly or quarterly basis by an independent person. Liabilities Liabilities represent financial obligations related to a variety of items. Some examples are listed below. Wages for work performed in current fiscal year but will not be paid until the following fiscal year Vacation/Paid Time Off/Sick Time is accrued at year end for any unused amount which is carried over to the next fiscal year Special collections taken up to be remitted at a later time Severance or early retirement benefits to paid over more than one fiscal year Other payments that are due over a period of time but not currently (for example, payment due to winners of a calendar raffle when the raffle happens in one year but payments will be made over two fiscal years) Lines of credit or current portion of long term debt Also, a liability can be an obligation of the parish or school for future performance for revenues received currently. An example includes prepaid school or faith formation tuition. Another example includes festival raffle money received in one fiscal year for a festival in the next fiscal year. The revenue is recorded as deferred revenue and is recognized when the service is performed. See journal entry examples # 9-3 and # 9-4 for proper recording of deferred revenue. Deferred revenues represent liabilities to the parish or school as the monies would be returned to the payer(s) if the event did not occur. See Chapter 12, Revenue Recognition for more details on this topic. CHAPTER 9 ACCOUNTS PAYABLE & SHORT TERM LIABILITIES PAGE 2 OF 5

Cut Off Considerations Cut off is a term that refers to recording transactions in the proper fiscal period. Cut off period is a length of time that the parish/school continues to keep its accounting records open to record invoices or other expenses or revenue that relate to the open period. Generally, many invoices for a given month are received in the first two weeks of the following month. As such, in order to accurately reflect the month s activity it is recommended to keep the accounting records open for a 5 business day period after month end. However at fiscal year end, it is recommended to leave the records open for three to four weeks to capture as much of prior year financial activity as possible. In accrual accounting it is important to record transactions in the period that they are incurred (for expenses) or received (for revenue--although it may be deferred revenue if it relates to the next fiscal year). When information comes to light after an accounting period is closed, it is prudent to consider whether an unrecorded transaction would be material enough to warrant reopening an accounting period. Information is material if its omission or misstatement could influence the economic decisions of the parish or school leadership taken on the basis of the financial statements. In an audit, cut off procedures are usually tested to make sure that the financial data is recognized in the proper accounting period. Year End Consideration At the end of the fiscal year, a review should be made and any accounts payable or liabilities that are not payable within the next 12 months should be categorized as Long Term Liabilities rather than Current Liabilities. However, the due date will be the determining factor and not the date of anticipated payment. This is of special concern for a parish or school that may be experiencing cash flow issues. DEFINITIONS Accounts Payable: Money which a parish owes to vendors for products and services purchased on credit. Items appear on the Statement of Financial Position as current liabilities, since the expectation is that the amounts due will be fulfilled in less than a year. Accrual Method of Accounting: Method of accounting that recognizes revenue when earned, rather than when collected. Expenses are recognized when incurred rather than when invoiced or paid. Accrued Liability: Is an expense incurred by a parish/school that has not yet been paid. Cut Off: Cut off relates to whether transactions and events have been recorded in the correct accounting period. CHAPTER 9 ACCOUNTS PAYABLE & SHORT TERM LIABILITIES PAGE 3 OF 5

Deferred Revenue: Advance payments or unearned revenue, recorded on the recipient s Statement of Financial Position (Balance Sheet) as an accrued liability, until services have been rendered. Deferred revenue is a liability because it refers to revenue that has not yet been earned. Deferred revenue liabilities represent products or services that are owed to the customer. As products or services are delivered over time, they are recognized as revenue on the Statement of Activities (Income Statement). Liabilities: An entity s legal debts or obligations that arise during the course of business operations. Liabilities are settled over time through the transfer of economic benefits including money, goods or services. Liabilities are recorded on the Statement of Financial Position (Balance Sheet) and include loans, accounts payable, mortgages, deferred revenues and accrued expenses. Current: Debts or obligations due within the next 12 months Long Term: Debts or obligations not due within the next 12 months. For example: 20 Year Mortgage. The amount due within the next 12 months would be categorized as a current liability and the remaining balance would be categorized as a long term liability. Materiality: Relates to the significance of transactions, balances and errors contained in the financial statements. Materiality defines the threshold or cutoff point after which financial information becomes relevant to the decision making needs of the parish or school leadership. Information contained in the financial statements must therefore be complete in all material respects in order for them to present a true and fair view of the affairs of the parish or school. Materiality is relative to the size and particular circumstances of individual parishes and schools. Short Term Obligations: Amounts due to be paid within 12 months for accounts payable or outstanding debt. Statement of Financial Position/Balance Sheet: A financial statement that summarizes an entity s assets, liabilities and net assets at a specific point in time. These three balance sheet segments give readers an idea as to what the entity owns and owes. The Statement of Financial Position/Balance Sheet follows the following formula: Assets = Liabilities + Net Assets/Equity IMPLEMENTATION GUIDANCE & JOURNAL ENTRIES Parishes and schools should document cut off procedures for month end and year end accounting periods. Year-end review should include but not be limited to: 1. Review all invoices received during the determined cut off period and record as accounts payable as needed. 2. Reconcile the accounts payable subsidiary ledger (Open Accounts Payable Listing) to the general ledger on a monthly and yearly basis. 3. Review wages, vacation time, sick time, paid time off, other liabilities that do not necessarily have an invoice and make sure to accrue any amounts due at month end and year end as needed. Some liabilities will be recorded monthly while others are reviewed and adjusted at year end. CHAPTER 9 ACCOUNTS PAYABLE & SHORT TERM LIABILITIES PAGE 4 OF 5

Journal Entry Examples: 9-1 Receipt of Invoice: Debit: Expense Accounts Credit: Accounts Payable Note: To record an accounts payable when an invoice is received. 9-2 Payment of Invoice: Debit: Accounts Payable Credit: Cash Note: To record the payment of an invoice. 9-3 Money received in one fiscal year that applies to the next fiscal year: Debit: Cash Credit: Deferred Revenue Note: To record deferred revenue when monies are received before they are due (for example: parish festival). 9-4 Record revenue when event occurs: Debit: Deferred Revenue Credit: Festival Revenue Note: To record revenue when an event occurs when monies had been received in a prior fiscal year. REFERENCES AND RESOURCES Located on archconnect you will find documents we referenced: o o All Financial Manual Published Chapters Archdiocesan Chart of Accounts CHAPTER 9 ACCOUNTS PAYABLE & SHORT TERM LIABILITIES PAGE 5 OF 5