A Discussion Paper on Accounts Payable Ratio

Cenap Ilter

doi:10.18267/j.aop.630

Abstract

Generally speaking, financial accounting textbooks are in harmony on the explanation of accounts payable and accrued liabilities/expenses. However, the same thing cannot be said for accounts payable turnover and days in accounts payable ratios. Different financial accounting textbooks and academic papers have different explanations for the accounts payable turnover ratio. The extant literature on the ratio is mainly comprised of two groups of authors. The first group relates the ratio to purchases and the second group relates the ratio to cost of goods sold (COGS). Purchases, in a purely theoretical sense, relate to periodic inventory method, whereas the perpetual inventory method relates purchases with inventory (being debit) and accounts payable (being credit). The second major group who explain the ratio by using the COGS figure ignore what is included in COGS. It should not include depreciation, amortisation, payroll and interest expenses to be meaningful for the purposes of the calculation of the ratio. In practice, manufacturing companies do not attempt to calculate these ratios due to the difficulty of obtaining the figures. These ratios can only be truly calculated from within the company if need be. Their accounting departments will be able to calculate the ratio correctly since they can reach the data. Any financial analyst not being able to reach a detailed breakdown of the expenses of the companies whose shares are being traded in stock exchanges will not able to calculate these ratios.

Highlights

The purpose of this paper is to clarify the inconsistencies of explanations and examples on accounts payable ratios in accounting textbooks
The excerpts below discuss the second part, with those ratios related to cost of goods sold (COGS): Days in accounts payable (A/P) measures how long it takes for the practice to pay its bills
They just take into account the accounts payable figure as if all expenses, purchases have already been invoiced to the company in question

Summary

Introduction

The purpose of this paper is to clarify the inconsistencies of explanations and examples on accounts payable ratios in accounting textbooks. Over the years of teaching and reading different accounting textbooks, the author realised that there were inconsistencies in the explanations and calculation of accounts payable ratios. In the course of running their day to day businesses, most companies purchase goods and services from their suppliers. These purchases are normally on credit with cash payments made after the goods and services are delivered. As a consequence, these transactions create liabilities – obligations for the purchaser to make payments in the near future.

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