Today, all organizations are responsible for creating specific financial statements representing all financial activities and performances that might affect their businesses. Different types of expenses are necessary for investors to identify the main features and changes in the company’s financial health and potential earnings. Accruals and payables are common accounting entries that should be discussed in financial statements, and their differences, adjusting practices, and ethical considerations will be discussed in this paper.
Understanding the differences between accruals and payables is vital in financial operations. Although both expenses presuppose the necessity to pay money, it is important to understand that accruals can be closed only after a particular accounting period, and payables should be paid within a chosen period (Hinojosa). Their fundamental difference is in their nature: accruals cover all earned revenues that have not been declared at the moment, while payables are reported debts that have not been paid at the moment.
The implications in the financial presentation of a company depend on the differences in accruals and payables. An accrual accounting method means the possibility of using a service prior to its payment without obligations, and a payable accounting method is characterized by a specific financial obligation before a creditor (Hinojosa). Thus, accruals are preferable and more accurate compared to payables as it offers more possibilities to present the financial situation of the company and underline annual expenses within a particular period.
Some adjustments are recommended for accruals and payables to introduce specific and clear accounting reports. For example, if a transition between different accounting periods is inevitable, accruals must be adjusted to cover incurred expenses. Another example is related to situations when the expense for one purchase should be covered within several periods. Finally, any adjustment or evaluation of accruals and payables is associated with ethical considerations about accrual calculations that emerge from time to time and affect the quality of the financial presentation of an organization. They include fraud or false reporting, a lack of transparency or confidentiality, and misleading reporting.
In conclusion, accruals and payables play an important role in creating strong and clear financial statements. All these issues, like the purposes of the chosen expenses, possible adjustments, and ethical issues, promote a better understanding of the differences and main features of accruals and payables in financial statements. Financial accounting is a complex discipline, and the use of definitions and comparisons facilitates the steps in formulating the necessary statements.
Work Cited
Hinojosa, Anastasia. “Accrued Expenses vs. Accounts Payable: Key Differences.” Indeed, Web.