Operating on the Cash Basis of Accounting would be so Easy.
On the cash basis of accounting, bills would count against the budget when the check was cut, and accounts payable would technically not exist.
Unfortunately, most governmental entities use modified accrual accounting which requires a bill to count against the budget when the related good or service is received, not when the bill is paid. Therefore, a little work is needed to figure out what amount is owed for goods and services received as of a certain date, but not yet paid for, and get that amount reported on the books.
Accounts Payable = All Unpaid Bills (Currently sitting on your desk or not)
The most important time to stress over getting the accounts payable balance right is at the fiscal year-end date. That’s because both the external financial statements and the annual financial audit focus on this key date.
If your organization has an 8/31 year-end, then start watching purchasing activity closely in July and August. Know what bills are still pending at year-end so you can set the accounts payable balance to the right amount as of that date.
Once you’ve identified what bills are still outstanding, put on your accountant’s hat and post them to the books as follows as of 8/31 or earlier:
Debit Appropriate Expense Account XXX
Credit Accounts Payable XXX
If you can catch them all, even those yet to arrive in the mail, you can avoid audit adjustments in this area when the audit is conducted. Also, if you can post all accounts payable to your books before the last governing body meeting of the fiscal year, you will also have a more complete picture of the expenditures side of the budget for last minute budget amendment purposes.
The Auditor will have a Crystal Ball
The annual financial audit is usually conducted at least a month or more after the fiscal year-end date. Therefore the auditor will be able to look into the future from the 8/31 date and see September and later bill payments.
Bills paid during this early time in the new fiscal year will be checked by the auditor to see if they were for goods or services purchased and received before the prior fiscal year-end. If this is the case, the next step will be to determine if these bills are included in accounts payable as of 8/31. If any are not, and they are considered material individually or in the aggregate, then an audit adjustment similar to the entry shown above will be proposed.
Yes, the cash basis of accounting would be nice. Most governmental entities follow modified accrual accounting though which requires the reporting of accounts payable.