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Changes in Accounts Payable

April 13, 2006

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If you use the accrual method of accounting, any increase in accounts payable must be added back to your accrual net profit to determine your cash flow. Under the accrual method of accounting, an account payable is recorded and an expense is increased when you receive a bill. Therefore, your accrual net profit is reduced by an expense that has not yet been paid in cash. Adding back the increase in accounts payable will adjust the accrual net profit so that it does not reflect the amount of expense not yet paid with cash or with a check.

A decrease in accounts payable must be subtracted from your accrual net profit to determine your cash flow. The decrease in accounts payable represents the net cash that was paid out of your business but not reflected as an expense in determining your accrual net profit for this accounting period. Under the mechanics of accrual accounting, the expenses associated with the accounts payable were recorded at the time the bills were received.

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