Understand Accounts Payables and Accrued Liabilities: a NFP Board Member’s How-to Guide
This article is part of a four-part series that defines key terms and important information for a board member to know and understand. The other three articles discuss receivables, deferred revenue and contributions and the basics of financial statements.
When I look at a non-profit organization’s (NPO) financial statement, one of the first questions I ask is are the accounts payable and accrued liabilities up to date? But I’m an accountant with more than 30 years of experience in the industry and just as much sitting on boards. And I know to ask that question because I have an acute understanding of what those two terms mean and why they’re important.
For board members that don’t have a financial background, these terms might not be common knowledge. But they’re crucial to assess an organization’s operations. This article defines them in a way that will make any board member—regardless of financial experience—ask those same questions when looking at a statement.
What are accounts payable?
It’s simple really. Accounts payable are invoices for good and services that the organization has received but has not yet paid as of the date of the reporting of the financial statements. If the accounts payable are not current, it’s possible that the organization’s financial statements will not represent an accurate snapshot of the operating results for the period.
What are accrued liabilities?
Accrued liabilities are estimates of the costs for the goods and/or services that the organization has already received but for which an invoice has not yet been rendered. Like accounts payable, if this is understated in the financial statements, then the operating result will likely be overstated.
Cash rich but in poor financial position
An organization can be “cash rich” but be in a poor financial position. How? By simply not paying its bills on a timely basis. Much in the same way a person can have a low credit score for missing bill payments. NPO’s are susceptible to this because oftentimes they lack access to debt and use their suppliers as creditors.
To assess the financial health of the organization at any point in time accurately, all revenue earned (not necessarily collected yet) and all expenditures incurred (not necessarily paid) need to be reflected for the same period. This provides a meaningful comparison of results reflected in the financial statements.
Important questions for board members to ask
Now that accounts payable and accrued liabilities have been defined, these are some of the questions board members should ask when reviewing either internal or year-end financial statements.
- Are the accounts payable and accrued liabilities up to date?
- Are there any outstanding bills?
- Utilities and corporate credit card bills are a common one. It’s best to include estimates in the accrued liabilities to have a more accurate estimate of year-to-date expenses if the bill has not been received in time to include on the financial statement.
- Have all payroll amounts been reflected?
- If employees are paid bi-weekly, the internal financial statements need to reflect an accrual for salaries earned by the employees from the last pay in the month to the end of the month.
- Excluding accrued vacation pay is a common payroll item missed by many organizations. This is often a significant liability with respect to the executive director position. For organizations that use a payroll service, this amount is generally calculated by them and would be easy for the internal accountant to record monthly.
Please keep this in mind: no accounts payable or accrued liabilities on the balance sheet should raise an immediate red flag that the financial statements are not accurate.
The board should ensure that there are procedures are in place that completely and accurately capture and address all accounts payable and accrued liabilities. GGFL is well versed in the non-profit realm. We have a team dedicated to the sector and are happy to offer advice and guidance to board members and organizations. Visit ggfl.ca/non-profit-organization/ to learn more.